Clues from FOMC Minutes
01/15/2014 12:01 am EST
The minutes from the FOMC meeting that resulted in a reduction in their bond buying, reveals some interesting views on the impact of their bond buying, says MoneyShows' Jim Jubak.
On January 8, the Fed released its minutes from the December 18 meeting of the Federal Open Market Committee. Everyone wanted to see what those minutes said, because that meeting in December was the meeting where the Fed decided not to taper, so there's a lot of stuff there. People were looking for some guidance on the economy. They're looking to see what the Fed's take was on how strong the US economy was going to grow, and they figured that would be the reason that the Fed had decided to taper, and that would clearly be in the minutes.
What's most interesting to me about the minutes, however, is that a lot of the Fed's thinking, a lot of the Fed's reasoning behind deciding to stop buying $85 billion a month in treasuries and mortgage backed assets and instead going down to $75, with the idea that, at some point, it would go down to zero, was that a lot of Fed voices saying, “Hey, you know, we're not getting very much effect out of this. We may indeed have run through the usefulness of quantitative easing. We may not be really changing interest rates very much. We may not be making the US economy grow faster, and indeed, if we're not getting very much positive effect for this, we're still adding $85 million a month to the balance sheet. The risk that we get from that balance sheet increase far outweighs any benefit that we're getting from those purchases, so, maybe we should just stop the purchases, since we're not getting enough benefit to outweigh the risk, let's indeed go with reducing purchases so we reduce the risk.”
That, to me, was surprising because it has a huge impact, if you think about the Fed's role as a, sort of, pioneer of quantitative easing in the way that it's caught on, really with the banks, particularly the Bank of Japan, and where the ECB, the European Central Bank is deciding not to go down that route but it's still possible for them. For the Fed to come out and say, “Hey, there is an end point, there's a point where this technique is not useful anymore, there's a point where it's too risky given the limited benefits, that really does, indeed, start to put some parameters.”
I think it makes it less likely that the European Central Bank will do a program of quantitative easing. European economy is still growing too slowly. European inflation is still nonexistent, so the ECB needs to do something about stimulating those economies, but it's pretty clear that they don't want to do quantitative easing, and I think the statement from the Fed adds to that argument.
On the other hand, the Bank of Japan is clearly into quantitative easing. Proportionately, they're buying way more in assets than the Fed ever did, to try to get the Japanese economy finally out of its deflationary period, but there again, I think they're likely to look at this and go, “Okay, these guys were saying there is some point at which the benefit of that diminishes. We need to watch out for that, that means that we can't do this forever,” and I think that's really the most interesting, most important thing, most important thing for global financial markets in the Fed minutes from their December 18 meeting.
This is Jim Jubak for the MoneyShow.com video network.