Fed minutes show policymakers debated tapering

Federal Reserve policymakers last month sharply debated whether to pare back the central bank's bond-buying stimulus, with some worried that the decision to delay the move could "undermine the credibility" of Fed policies, Fed minutes show.

Despite the delay, most Fed policymakers continued to believe last month that the Fed likely will begin to pull back the bond purchases this year and end them by mid-2014, according to the minutes of the Fed's Sept. 17-18 meeting. Now, however, the ongoing showdown in Congress over the budget could push any tapering of the stimulus into 2014, Barclays Capital economist Michael Gapen said in a research note.

The Fed's decision not to dial down its $85 billion in monthly government bond purchases — which are intended to hold down long-term interest rates — stunned financial markets. Fed Chairman Ben Bernanke had signaled since May that the Fed likely would soon reduce the bond-buying and end it by mid-2014 if the economy and job market continued to show improvement. Most economists surveyed by USA TODAY expected the tapering to begin in September.

But despite solid job growth since the Fed began the purchases a year ago, several officials viewed recent economic data "on the disappointing side" and "were not yet adequately confident of continued progress." While the unemployment rate fell to 7.3% in August from 8.1% last September, much of the recent decline is the result of fewer Americans working or looking for work. And job growth has slowed in recent months.

Policymakers also worried about the effects of recently rising interest rates on the housing market and about the then-looming showdown in Congress over funding the government and raising the nation's debt ceiling.

Several Fed officials said that tempering the bond purchases in September may trigger a further rise in interest rates because it would signal the Fed's intention to rein in the stimulus despite "mixed recent data." As a result, "a number" of Fed officials called for "a cautious approach."

But other Fed policymakers who favored scaling back the purchases said recent reports "were broadly consistent" with the Fed's employment outlook in June. They also cited the "meaningful cumulative progress" in the labor market since the purchases began.

And with financial markets expecting a reduction in purchases, postponing the move "could potentially undermine the credibility or predictability of monetary policy," those who backed tapering said, according to the minutes.

Such concerns made the decision to hold off "a relatively close call," the minutes said.

In the end, "All members but one judged that it would be appropriate for the (policymaking) committee to await more evidence that progress would be sustained before adjusting the pace of asset purchases."