Fed Officials Divided Over Buying More Securities

--Fed officials divided over whether central bank should buy more securities
--Central bank policy makers have divergent views on where interest rates should be at end of 2014
--Fed officials see some economic bright spots, but still cautious




WASHINGTON -- U.S. Federal Reserve officials were divided at their last meeting over what the central bank's strategy should be for buying more securities in an effort to keep interest rates low and spur investment.

"A few members' of the central bank's policy-making committee thought the Fed could start adding more longer-term securities to its balance sheet "before long," or in 2012, according to minutes of the Fed's policy meeting Jan. 24-25, released Wednesday after the customary three-week lag. However, "a number of participants" indicated they were open to the idea "if the economic outlook deteriorated" or if inflation seemed likely to remain below 2%. Taken together, there appeared to be no clear consensus for swift additional action by the Fed on this front, though the door is open for it.

Fed officials did make clear, however, they have no intention of shrinking their holdings any time soon. Most participants expected the central bank would begin selling agency securities "no earlier than 2015."

The Fed's portfolio has more than doubled since the financial crisis of 2008 and 2009, as the central bank bought mortgage-backed securities and government bonds to help keep interest rates low and stimulate the economy. The Fed held $2.931 trillion in assets, as of the week ended Feb. 8.

Fed officials' views on where the federal funds rate should be by the end of 2014 were "widely dispersed." At its last meeting, the Fed said it expected to keep the federal funds rate, the rate at which banks lend to each other overnight, at "exceptionally" low levels until late 2014. It is not entirely clear if the Fed means near zero when it says exceptionally low, or some slightly higher number. If it means some slightly higher number, that would imply interest rate hikes might come before the end of the year.

The minutes didn't completely clarify the matter. At the late January meeting, five officials thought the bank should begin tightening monetary policy some time in 2014, while six others thought the first increase would not be necessary until 2015 or 2016. Meanwhile, six officials thought rates would need to be raised within the next two years.

By the end of 2014, two-thirds of Fed officials thought the federal funds rate would be 1% or below, while five others believed the rate should be 2% or higher.

The federal funds rate has been trading between zero and 0.25% since December 2008.

Low interest rates can help a weak economy by spurring borrowing to finance investment and spending. But if the economy strengthens faster than the Fed anticipates, low interest rates could fuel faster inflation.

Fed officials saw some bright spots in the economy, noting the most recent data showed the economy had been "expanding moderately," but they remained cautious.

"In general labor market indicators pointed to some further improvement in labor market conditions, but progress was gradual and the unemployment rate remained elevated," the minutes stated. The officials "generally agreed that the economic outlook had not changed greatly since they met in December."

A majority of the Fed officials were preoccupied by downside risks to their forecasts of real gross domestic product growth, and saw a risk that the unemployment rate could end up higher than they were forecasting.

U.S. growth could be held back this year by slower global economic growth, in particular as European countries slash their budgets in response to the sovereign debt crisis. Weaker demand from Europe could slow growth of U.S. exports, they worried.

The minutes noted Federal Reserve Board Member Daniel Tarullo abstained from voting to adopt a statement of the central bank's longer-run goals because "he questioned the ultimate usefulness of the statement" in communicating the committee's strategy.