Fed officials stay cautious in shifting market

FOMC minutes reveal careful pace of bond purchases

The Fed’s latest Federal Open Market Committee meeting minutes paint a promising picture for America’s housing market even though members remain cautious heading into the future.

Even though Fed officials announced a pending taper of monthly mortgage-backed securities and Treasury purchases in December, the committee remains concerned about the potential for tightening market conditions as the Fed sends signals of a stronger economy. Financial conditions could tighten if the committee's moves are construed as leading to a quick withdrawal of Fed intervention, the minutes suggest.  

As a result, the minutes stated, “The committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps."

The pace of asset purchases still remains heavily contingent on the committee’s labor market and inflation outlook, as well as its assessment of the efficacy and costs of purchases, the FOMC stated.

The committee decided it would reduce its purchases of mortgage-backed securities to $35 billion per month from $40 billion. Additionally, the Fed will reduce its purchases of longer-term Treasury securities to $40 billion per month rather than $45 billion.

The committee also said the current federal funds rate of 0 to 1⁄4 percent is appropriate as long as the unemployment rate remains above 6.5%.  

The only dissenting vote was Eric Rosengren, who argued the committee should wait for more convincing evidence that economic growth is rising faster than its potential and that inflation will return to the committee’s 2% objective.

"Almost all participants continued to project that the rate of growth of economic activity would strengthen in coming years, and all anticipated that the unemployment rate would gradually decline toward levels consistent with their current assessments of its longer-run normal value," minutes from the Dec. 17-18 meeting stated.  

Meeting participants say they're watching the trajectory of interest rates closely, but they do not expect rates in the spring to match the rapid pace set last spring when rumors of a Fed taper reached the market.

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