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Investments

FOMC minutes forewarns Fed to vary pace of monthly bond purchases

Many Federal Open Market Committee participants emphasized that the Federal Reserve should be prepared to vary the pace of monthly bond purchases due to the risks and benefits of further commitment to the third-round of open-ended quantitative easing.

Members of the Federal Open Market Committee agree that accommodating the economic recovery through quantitative easing is key, to a point. The argument that remains is when that commitment should finally come to an end.

"A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred," according to the minutes.

Several other argued that the potential costs of reducing or ending asset purchases too soon was also critical, "or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred." 

Participants stressed the importance of communication the Committee’s commitment to maintaining a highly accommodative stance of policy as long as it is warranted by economic conditions.

As a result, many discussed the possibility of "providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases." 

Several participants also noted that a large portfolio focused on long-duration assets would, given certain circumstances, expose the Federal Reserve to significant capital losses when the holding were “unwound.”

With the recovery in housing continue to show signs of momentum the foreshadowing in the December FOMC minutes signaling a QE3 wind down became more event in January’s FOMC minutes.

"A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred," the minutes noted. 

On Jan. 30, the FOMC said the Fed plans to continue purchasing additional agency mortgage-backed securities to foster a nascent housing recovering while simultaneously combating elevated unemployment levels.

The FOMC made that statement after members met this week and concluded the Fed would continue acquiring agency MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion a month.

cmlynski@housingwire.com

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