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Unease with Easing: How low can interest rates go? Maybe no lower than where they are now.
That's one plausible take-away from news that members of the Federal Open Market Committee are split over whether to continue through year's end the Federal Reserve's third round of quantitative easing, known as QE3.
"Several" FOMC members want "to slow or to stop purchases well before the end of 2013" and one member opposes them altogether, according to minutes of the FOMC's December meeting. A "few" of the 12 voting FOMC members want to keep buying assets until the end of 2013 and are backed by a "few" more who want "considerable accommodation" but did not set a date, the minutes indicate.
Under the QE3 program, launched last September, the central bank announced plans to buy $40 billion in mortgage bonds each month until the outlook for the labor market "improved substantially." In December, the Fed said it would also expand its holdings of Treasuries by $45 billion a month, replacing a program in which it acquired that amount of long-term Treasuries each month by selling the same amount of short-term Treasuries (aka operation twist). That left the total size of its portfolio unchanged, according to the New York Times.
"While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased," the meeting account said.
"Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet," the account continued, before concluding, "One member viewed any additional purchases as unwarranted."
In standard Fed language, "a few" means two or three, while "several" might be four or five, suggesting that the committee is evenly split, according to the Financial Times. New voting members will rotate on to the FOMC in 2013, but they are unlikely to change its behavior much, the paper added.
The New York Times quoted Diane Swonk, chief economist at Mesirow Financial, as stating that four of the dozen FOMC members will be replaced this month and that two new arrivals — Charles L. Evans, president of the Federal Reserve Bank of Chicago, and Eric S. Rosengren, president of the Federal Reserve Bank of Boston — have been outspoken supporters of asset purchases.
If the financial markets' immediate reaction is any indication, the FOMC split immediately added to expectations that U.S. interest rates will rise; a dollar index gained 0.7% on the heels of the news, the Financial Times noted. U.S. stocks fell, while Japanese stocks rallied on the expectation that a falling yen would support exporters. The yield on 10-year Treasury notes jumped by 7 basis points to 1.9%.
World markets' quick reactions does not indicate that the Fed is on the verge of changing policy or ending QE3.
The Fed said in December that it expects to keep interest rates low until unemployment falls below 6.5%, as long as inflation is expected to stay below 2.5%. It said it would continue QE3 until there was a "substantial improvement" in the labor market without defining what a "substantial improvement" would look like. The Fed's forecast indicates that unemployment will remain between 7.4% and 7.7% at the end of 2013, suggesting that might be enough to bring QE3 to a halt, reports the FT. New York Times, Financial Times, Bloomberg