Fed Minutes Show Concerns About Bubbles, Usefulness Of QE3

(RTTNews) - The Federal Reserve tapered their massive bond-buying program in December as they observed diminishing returns on the billions spent to keep the economic recovery going.

The minutes of the Dec. 17-18 Federal Open Market Committee meeting showed policy makers worried about the potential for excessive risk-taking in the financial sector (i.e., the same type of speculative lending that caused the panic of 2007 in the first place).

At that meeting, the Fed scaled back its asset-purchase plan by $10 billion per month to $75 billion.

The Fed distinguished between its quantitative easing program and its benchmark interest rate, which it has vowed to keep near zero until the recovery is secured.

"It was noted that the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy because purchases work in part by affecting term premiums and policymakers have less experience with term premium effects than with more conventional interest rate policy," the minutes said.

On the diminished usefulness of the bond-buying plan:

"A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment."

The economic recovery was proceeding at a moderate pace over the holidays, according to policy makers.

"Almost all participants continued to project that the rate of growth of economic activity would strengthen in coming years," the wrote.

On why they tapered, the FOMC judged that recent improvements in the jobs market would continue:

"The most recent data showed that increases in nonfarm payroll employment had averaged around 190,000 per month for the past 15 months, and the unemployment rate had fallen more quickly over that period than most participants had expected. Moreover, participants generally anticipated that the improvement in labor market conditions would continue, and most had become more confident in that outlook."

Policy makers debated the size of the reduction in stimulus, with some wanting the central bank to hold off altogether on scaling back the program.

At the same time, "some" policymakers advocated "a larger reduction."