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“Marginal Efficacy” of Bond Purchases Declining: FOMC Minutes

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“Marginal Efficacy” of Bond Purchases Declining: FOMC Minutes

The economic gains of monetary easing are declining, according to officials at the Federal Reserve. The minutes of the December 17-8 policy meetings revealed broad agreement about reducing the pace of monthly asset purchases, as officials shift their attention from employment to inflation.

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” read the minutes. As US recovery continues to deepen, there is growing perception the world’s largest economy will be strong enough to stand on its own. At the same time, however, the Committee “emphasized that its holdings of longer-terms securities… would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates…,” the minutes state.

The Federal Reserve was impressed by the pace of jobs growth in the the fourth quarter, using declining unemployment to justify the reduction in asset purchases. That said, the major concern no longer appears to be employment, but rather inflation, which appears to be the key guidepost for future monetary policy.

Consumer inflation has hovered around 1 percent for months, well below the Fed’s coveted 2 percent target. Anxieties over inflation, combined with the negative impact of rising mortgage rates on the housing market, helped guide the Fed’s decision last month.

The Federal Reserve will coalesce once again in late-January to discuss interest rates and determine the pace of future bond cuts. While no schedule for stimulus reduction has been set, the pace of recovery may warrant a more concerted effort to wind down the pace of record stimulus.

According to the minutes, some Fed officials “expressed the view that the criterion of substantial improvement in the outlook for the [labour] market was likely to be met in the coming year if the economy evolved as expected.”

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