Will U.S. Fed stimulus taper off?

The information reviewed at the Federal Open Market Committee’s latest policy meeting, held April 30 to May 1, showed economic activity in the U.S. expanded at a moderate pace in the first quarter of 2013.

The meeting minutes reveal, “In March, the unemployment rate edged down further, although it continued to be elevated, and employment growth slowed. Consumer price inflation was relatively low, while measures of longer-run inflation expectations remained stable.”

It adds, “After faster gains in January and February, the unemployment rate was 7.6% in March, a little below its average in Q4 2012. The labor force participation rate also edged down to below its fourth-quarter average.”

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What’s more, the FOMC found conditions in the U.S. housing sector are positive. In particular, “real expenditures for residential investment expanded briskly in the first quarter, although from a low level, [and] total combined starts of new single-family homes and multifamily units increased in March to a level well above that at the beginning of [this] year.”

Home prices have risen and sales of new homes also rose in March, though less people are selling their homes, say the meeting minutes.

Overall, the committee found financial conditions across the country have improved. But the meeting minutes say, “Yields of longer-term Treasury securities and foreign benchmark sovereign bonds declined appreciably.”

This reflects the negative tone of U.S. and foreign economic data releases, as well as policy actions by the Bank of Japan that were more accommodative than analysts had expected. At the same time, however, the minutes said solid quarterly earnings reports lifted equity prices.

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Despite positive data, the FOMC agreed people should still expect little real GDP growth over the next 12 months. The minutes say, “With fiscal policy expected to be tighter this year than last year, [it] still anticipated that the pace of expansion in real GDP would only somewhat exceed the growth rate of potential output in 2013.”

Further, officials’ forecasts for inflation was also little revised since the March meeting.

Due to these stagnant statistics, the meeting minutes show the committee decided that “with appropriate monetary policy accommodation, U.S. economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels that the [it] judged consistent with its dual mandate.”

After an 11-1 vote, the majority of the FOMC agreed to continue purchases of $40 billion per month of mortgage-backed securities, along with purchases of longer-term Treasury securities at a pace of $45 billion per month. It will maintain its reinvestment policies.

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Despite the majority vote, though, the meeting minutes say, “A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased…since it was launched last September. [This is true] despite a notable decline in the unemployment rate and other improvements in the labor market since then.”

Specifically, the one member who voted against continuing stimulus was quoted as saying, “I continue to view monetary policy as overly accommodative and therefore as posing risks to the long-term sustainable growth of the economy.” She expressed concern that the stance of policy might be fostering imbalances and excessive risk-taking in some financial markets and institutions.

Further, she found the committee’s current and ongoing asset purchases are putting “future conduct of policy at risk since it raises uncertainty and affects future inflation expectations.” She preferred that FOMC announce a near-term tapering of asset purchases so policy moved toward a more appropriate stance.

Due to these reservations, FOMC showed its willingness to adjust the flow of purchases should the economy surge. The minutes add, “the committee included language in [its] statement…that said the committee was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.”

The committee also included a review of exit strategy principles.