WASHINGTON - Stronger job gains and other signs of an improving economy led the Federal Reserve last month to modestly reduce its bond purchases by $10 billion a month.
But minutes of the Dec. 18-19 meeting released Wednesday showed that some participants worried that financial markets might misread the move as a step toward raising its key short term interest rate.
The bond purchases are intended to keep long-term rates low, and encourage more borrowing and spending.
In response, the Fed said it would keep its short-term rate low “well past” the time the unemployment rate dropped below 6.5 percent, as long as inflation stayed low.
Some members wanted to lower the unemployment threshold to 6 percent. But the majority favored looking at a range of measures of the job market - and not just the unemployment rate - in making a policy change.
The economy has added an average of 200,000 jobs a month from August through November. The unemployment rate fell to a five-year low of 7 percent.
Many Fed members called the recent job gains “meaningful,” according to the minutes. And some felt that the gains were likely to continue and meet the Fed’s expectations for a stronger economy in 2014.
The government will release the December employment report Friday.
A private report Wednesday raised expectations for Friday’s report. Payroll provider ADP said businesses added 238,000 jobs in December, up slightly from 229,000 in the previous month.
Last month the Fed announced that it would reduce its monthly bond purchases from $85 billion to $75 billion starting this month. And it said it expected to further reduce the bond purchases in “measured steps” at later meetings, if the economy and the job market continue to show improvement.
Many economists believe the Fed could reduce the bond purchases by an additional $10 billion at each of the Fed’s forthcoming meetings, if the economy continues to add a healthy number of jobs. At that pace, the Fed would end its program of new purchases by the end of the year.
Some analysts also believe the Fed could go further in strengthening its forward guidance about short-term rates at future meetings now that Janet Yellen has been confirmed as the incoming chairman to succeed Ben Bernanke.
Bernanke will preside at his last meeting Jan. 28-29. Yellen is expected to take over on Feb. 1. Yellen was a supporter of Bernanke’s efforts to revive the economy after the recession and because of that analysts are not looking for any major changes in the direction of policy when Yellen takes over.
Fed interest-rate policies are made by the Federal Open Market Committee, which is composed of seven Washington board members and five of the 12 regional bank presidents. The New York Fed president always has a vote on the policy panel and the other four votes rotate annually among the other 11 Fed presidents.
President Barack Obama has the chance to fill four vacancies on the Fed board. Beyond his choice of Yellen to replace Bernanke, Obama has not announced his picks for the other openings. Stanley Fischer, a former economics professor at the Massachusetts Institute of Technology who served until last June as head of the Bank of Israel, has been mentioned as a choice for vice chairman. Lael Brainard, formerly the Treasury Department’s top international official, could be tapped for one of the other openings.
Business, Pages 23 on 01/09/2014