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Fed officials show concern over bond purchases

Federal Reserve policymakers remain divided on the future of the central bank's bond-buying program, according to minutes of the January meeting of the Federal Reserve Open Market Committee released Wednesday. Some believe that the program may need to end prior to the achievement of the Fed's announced goal of improvement in employment.

Fed officials announced Jan. 30 that they would continue to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month, a policy popularly known as quantitative easing. The Fed hasn't said when these asset purchases will end. Instead, it has said that the purchases will continue if "the outlook for the labor market does not improve substantially."

A number of policymakers, however, said that the costs, and risks of quantitative easing might lead the Fed to taper or end its purchases before a substantial improvement in the outlook for the labor market had occurred.

The minutes, which describe the discussions of policymakers during the two-day January FOMC meeting, reveal that "most participants" believe the asset purchases have been effective at stimulating the economy and easing financial conditions. Nonetheless, concerns about quantitative easing appear to be mounting. According to the minutes, "many participants" in the meeting expressed concerns about "potential costs and risks arising from further asset purchases."

The minutes of the meeting do not reveal the identities of which policymakers raised which concerns, referring instead to vague descriptions such as "many participants" or "some participants." It's anyone's guess what the difference between "several participants" and "many participants" might be.

Among the risks raised at the meeting were "complications" that additional purchases could cause for an eventual Fed exit from its accommodative monetary policy (attributed to "several participants"), inflationary risks ("a few" participants), and fostering market behavior—presumably reaching for yield—that could undermine financial stability ("some" participants).

The minutes give hints at potential changes to the quantitative easing program.

"Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved," the minutes said.

One option discussed would be for the Fed to vary the size of purchases from meeting to meeting, much as the Fed used to vary interest rates from meeting to meeting. This option is attributed in the minutes to "one participant."

Policymakers are also divided on the effect of quantitative easing on financial markets.

"A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects," the minutes say.

The staff of the Fed was asked for additional analysis ahead of future meetings to support the FOMC's ongoing assessment of the asset purchase program.