Wednesday, August 21, 2013

FW: BREAKING NEWS: Minutes Highlight QE Discord on Fed Board

Markets are down on release of the latest Fed Minutes.   Show Some Discord Over Tapering of QE


"Broadly comfortable", "Almost all", "a few", sure does not sound like they are all on the same page.




Federal Reserve policy makers were "broadly comfortable" with Bernanke's plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting show.


The minutes said "almost all" FOMC members agreed the Fed should begin reducing its purchases of bonds later this year, and conclude QE by the middle of 2014. However, one member said the central bank should signal it will begin cutting its purchases in the "near future." Broadly speaking, the FOMC said the economy was expanding at a "modest" pace in the first half of the year, but worried about excessively light inflation.


"Almost all" committee members agreed that a change in the purchase program was "not yet appropriate" and "a few" said "it

might soon be time" to slow the pace of purchases. "A few" emphasized the importance of being patient.


The Fed staff continued to work on tools for the exit from the record stimulus, briefing FOMC participants on the possibility

of "a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money

market interest rates."   The minutes said such a tool would allow the FOMC to offer an overnight, risk-free instrument to a "wide range of market participants," and possibly improve their ability to keep short-term rates at desired levels.




     FOMC participants continued to expect economic growth to

pick up in the second half of 2013 and "strengthen further."

The minutes said "a number" of participants were somewhat less

confident than they had been in June due to higher mortgage

rates, higher oil prices, slow growth in U.S. export markets,

and the risk that fiscal restraint might not decrease.


                         Payroll Growth


     The FOMC affirmed a pledge on July 31 to continue bond

buying until seeing signs "the outlook for the labor market has

improved substantially." While employers in July expanded

payrolls by 162,000 workers, the smallest gain in four months,

the jobless rate fell to a more than four-year low.

     Payroll growth over the past six months has averaged almost

200,000, compared with a 141,000 average in the six months

before September, when the FOMC announced a third round of bond

buying. Also, jobless claims fell to 320,000 in the week ended

Aug. 10, the least since October 2007.

     "We've come a long way," said Joe Carson, who helps

oversee $434.6 billion as director of global economic research

at AllianceBernstein LP in New York. "The unconventional policy

of QE has given you a lot of bang for the buck," he said before

release of the minutes. "The Fed should be pretty happy with

the outcome they've had from this because they've had growth

with little inflation."


                        Inflation Measure


     With inflation well below the FOMC's 2 percent target,

policy makers have leeway to press on with bond buying that has

pumped up the Fed's balance sheet to a record $3.65 trillion.

Their preferred inflation gauge, the personal consumption

expenditures index, increased 1.3 percent in the 12 months ended

in June. Excluding food and energy, the index rose 1.2 percent.

     Chicago Fed President Charles Evans, a voting member of the

FOMC this year who dissented twice in 2011 in favor of easier

policy, said this month he wouldn't rule out a reduction in bond

purchases at the meeting next month.

     Three other Fed district bank presidents who don't hold a

vote this year -- Sandra Pianalto of Cleveland, Richard Fisher

of Dallas and Dennis Lockhart of Atlanta -- also expressed

openness this month to a dialing down in so-called quantitative

easing in September.

     St. Louis Fed President James Bullard, who has backed

continued bond buying, said policy makers should be careful not

to change course based solely on their economic outlook.

     FOMC forecasts "have tended to be too optimistic,"

Bullard, who votes on policy this year, said in an Aug. 14

speech. "Caution is warranted in taking policy action based on

forecasts alone."


                         Growth Outlook


     FOMC participants predicted in June that gross domestic

product will grow this year from 2.3 percent to 2.6 percent.

During the second quarter, GDP rose at a 1.7 percent annualized

rate, after a 1.1 percent gain in the first quarter, according

to the Commerce Department.

     Accelerating growth indicates the economy is overcoming

across-the-board federal budget cuts known as sequestration that

started in March. Gains in manufacturing, record exports, looser

bank lending and a sustained housing recovery are improving the

odds for a speed up in growth.

     Stronger U.S. growth and speculation the Fed will scale

back bond purchases has helped erase about $1.37 trillion from

the value of emerging-market equities in the past three months,

data compiled by Bloomberg show.

     Emerging-market stocks dropped for a fifth day. India's S&P

BSE Sensex and Indonesia's Jakarta Composite Index both fell to

11-month lows today, while Turkey's lira fell to a record low

versus the dollar.


                        Treasury Yields


     In the U.S., speculation over the timing for a Fed tapering

has pushed up borrowing costs. The yield on the 10-year Treasury

note this week rose to a two-year high of 2.88 percent.

     The interest rate on a 30-year fixed home loan climbed to

4.4 percent last week, according to data compiled by Freddie

Mac. The benchmark gauge for home financing increased from a

record-low 3.31 percent in November and posted its biggest-ever

quarterly gain of 25 percent from April to June.

     Higher mortgage rates aren't deterring buyers. Sales of

previously owned homes climbed last month to the fastest pace

since November 2009 as more buyers entered the market, the

National Association of Realtors said today.

     Rising yields have been accompanied by improving confidence

among consumers, whose spending makes up more than two-thirds of

the world's largest economy. The Bloomberg Consumer Comfort

Index early this month reached the highest reading since January

2008. The New York-based Conference Board's confidence gauge in

June and July also had the strongest two months in more than

five years.


                           Home Depot


     Home Depot Inc., the largest U.S. home-improvement

retailer, raised its annual forecast yesterday as shoppers

buoyed by the housing recovery spent more on projects. The

Atlanta-based company said rising home prices are helping

consumers spend more.

     Some consumers are reluctant to spend beyond necessities,

dimming the outlook retailers including Wal-Mart Stores Inc.

     The world's largest retailer, Wal-Mart cut its annual

profit forecast this month. Americans will probably continue to

curb spending amid higher payroll taxes and increased gasoline

prices that sap buying power, Chief Financial Officer Charles

Holley said on an Aug. 15 earnings call.



John Broussard

State of Louisiana

Department of the Treasury


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