Some Fed Officials Had Fairly High Threshold to Alter QE2 Size

Federal Reserve policy makers said that improvements in the economy didn't meet the threshold for scaling back their plans to purchase $600 billion in bonds to help bring down the unemployment rate and stop inflation from falling too low.

“While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment,” the Fed said in minutes of its Dec. 14 policy meeting, released today in Washington.

The Fed’s Open Market Committee “emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments,” according to the minutes. “However, some indicated that they had a fairly high threshold for making changes to the program,” the minutes added.

The minutes show that with growth picking up since the easing program began, Fed officials remain focused on an unemployment rate forecast to be high for some time and an inflation rate that is lower than the Fed prefers
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During the meeting, Fed officials affirmed their pledge to purchase $600 billion in Treasury securities through June. The meeting also marked the two-year anniversary of near-zero interest rates, as the central bank reiterated its plan to keep rates “exceptionally low” for an “extended period.”

Since Fed Chairman Ben S. Bernanke and his colleagues announced the so-called quantitative easing policy on Nov. 3, financing conditions have eased for companies, U.S. stocks have increased, expectations for inflation have risen and the dollar has gained strength.

Extra Yield
The extra yield, or spread, investors demand to own high- yield, high-risk securities instead of government debt declined to 5.32 percentage points yesterday from 6.81 percentage points on Aug. 27, when Bernanke signaled his willingness for a second round of easing in a speech in Jackson Hole, Wyoming, according to Bank of America Merrill Lynch index data. Since Bernanke’s speech the Standard & Poor’s 500 Index has increased by 19.5 percent, closing yesterday at 1,271.87.

Also, investors expect prices to rise by 2.3 percent over the next 10 years, as measured by the spread between nominal and inflation-indexed Treasury bonds, compared to expectations of 1.6 percent inflation on the day of Bernanke’s speech.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net