* A ‘clear presumption’ of more $10-bln cuts to bond buys
* Officials poised to adjust forward guidance on rates
* Financial stability risks could play role in new language
By Jonathan Spicer
Feb 19 (Reuters) - Several Federal Reserve policymakers wanted to drive home the idea that their asset-purchase program would be trimmed in predictable, $10-billion steps unless there is a big economic surprise this year, according to minutes of their last meeting.
Minutes of the Fed’s Jan. 28-29 policy meeting, released on Wednesday, showed the officials were nearing a decision on how to adjust a promise to keep interest rates low for a while to come, including the possibility of incorporating financial stability concerns in that promise.
At the meeting, which was former chairman Ben Bernanke’s last, the Fed ultimately decided to make another modest cut to its bond-buying program, which now runs at $65 billion per month. It made the move despite turmoil at the time in emerging markets brought on in part by the withdrawal of Fed stimulus.
“Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each (policy) meeting,” the minutes said.
A number of policymakers at the table also said the tapering plan should however be adjusted if the economy substantially deviated from expectations.
As it stands, the Fed under its new Chair Janet Yellen aims to wind down and halt the bond buying later this year. Its next policy-setting meeting is March 18-19.
Beyond the expected cut to bond buying, the Fed at the January meeting made no changes to its other main policy plank: its pledge to keep interest rates low for some time to come.
The Fed has promised to keep interest rates near zero until well after the U.S. unemployment rate, now at 6.6 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target.
The minutes showed Fed officials expect to alter this guidance soon, given how close the current jobless rate is to the 6.5-percent rate-hike threshold, and the minutes suggested a lack of appetite for simply moving the threshold lower.
In what might come as a surprise to some, the officials raised the possibility that financial-market risks, such as asset-price bubbles, should play a bigger role in the decision on when to tighten policy.
“Several participants suggested that risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment rate threshold is crossed..” the minutes said.
Several officials also argued that any refreshed forward guidance should stress the Fed’s “willingness to keep rates low if inflation were to remain persistently below the Committee’s 2 percent longer-run objective.”
As it stands, Wall Street economists expect the Fed to keep rates near zero until around the third quarter of next year, a prediction that aligns with that of the central bank itself. The challenge for the Fed is adjusting its forward guidance without sparking turmoil in bond markets.
BERNANKE‘S LAST STAND
The minutes also showed a few officials raised the possibility of tightening policy “relatively soon,” though they seemed to be in the minority. While the tone of the meeting was generally upbeat, officials also noted that the turmoil in emerging markets could threaten U.S. economic growth.
The more hawkish Fed policymakers “will be increasingly vocal dissenters, but their dissent may fall on deaf ears,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management.
The Fed under Yellen is “ultimately going to be just as dovish in terms of what policies are actually implemented,” he added. “The Chair will have her way.”
Some participants in the discussion wanted to amend the Fed’s statement on longer-run goals and monetary policy strategy to explicitly indicate that inflation running persistently below the 2-percent target is as undesirable as inflation running persistently above it.
In the end, however, Fed officials made only minor changes to the statement, with Fed Board Governor Daniel Tarullo abstaining on that point because “he continued to think that the statement had not advanced the cause of communicating or achieving greater consensus in the policy views of the Committee.”
Only 10 officials voted on Fed policy in January, but a broader group of 17 took part in the meeting. It was the first meeting without a dissent since June 2011, a sign of how tumultuous Bernanke’s tenure has been.