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Friday October 16, 2009

Fed considers more asset buying


More aggressive purchases discussed in FOMC meeting

WASHINGTON: US Federal Reserve policymakers last month discussed whether they should increase asset buying if the economic outlook worsened, and some argued that more aggressive purchases would aid the recovery.

”Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS (mortgage-backed securities) could help to reduce economic slack more quickly than in the baseline outlook,” according to minutes of the Fed’s Sept 22-23 meeting out on Wednesday.

The US central bank held interest rates near zero as expected after the meeting of its policy-setting Federal Open Market Committee (FOMC), and voiced guarded optimism about the sustainability of the country’s economic recovery.

It also opted to extend its mortgage debt buying campaign until the end of March 2010 from a previously announced close of Dec 31, 2009, while keeping the total size of the purchases the same at US$1.45 trillion.

The minutes repeated that Fed policymakers felt that economic conditions were likely to warrant exceptionally low rates for an extended period.

There also appeared to have been no discussion at the September meeting about changing this language, or to more broadly define an exit strategy, beyond emphasising that the Fed had the tools it needed to accomplish this withdrawal of monetary policy stimulus when the time was right.

”The main insight from the minutes came from what was not discussed,” said Millan Mulraine, economics strategist TD Securities in Toronto.

With rates already as low as they can go, the Fed is buying agency mortgage debt together with longer-dated US government bonds as part of its efforts to stimulate activity.

This action has already doubled the size of its balance sheet to above US$2 trillion since last year, and although the current asset purchase campaign is winding down, the Fed made plain that this strategy could be re-examined if necessary.

”Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated,” the Fed said.

However, policymakers were divided over the likely benefits of further increasing the size of its balance sheet.

The asset purchase campaign has made Fed critics nervous that it is effectively “monetising” US debt by purchasing government bonds at a time when the country faces a record budget deficit, which they say could spark future inflation.

One Fed policymaker, possibly reflecting this concern, believed that an improved economic outlook could justify scaling back the size of the asset purchase programme that had already been announced, although this view did not prevail. — Reuters


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