For years, fiscal policy conservatives have been shouting that the Federal Reserve will have to deal with the consequences of its massive stimulus efforts. It seems the time is near, as Federal Reserve minutes from January show central bank officials in disagreement over how and when the Fed will end its stimulus efforts.
According to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting, officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.”
Fed Chairman Ben Bernanke has advocated a central bank policy that would continue purchases of Treasury and agency mortgage-backed securities until the outlook for the labor market improves “substantially.”
But members of the committee are reportedly divided down the middle about adhering to Bernanke’s policy, with half favoring ending bond purchases by mid-2013.
At least one Fed official, Esther L. George, stated concern that the continued high level of monetary accommodation increases the risks of future economic and financial imbalances as well as an increase in long-term inflation. Other members said that when the Fed readies itself to offload some of the bond purchases in its portfolio the central bank could experience “possible complications” and “significant capital losses.”
For now, the central bank is slated to continue on its current path of near-zero interest rates and $85 billion of monthly bond purchases. Next week, Bernanke is scheduled to testify before the House Financial Services Committee to explain the Fed’s ongoing policy. That committee is chaired by Representative Jeb Hensarling (R-Texas), who has previously criticized the Fed for “a multitude of fiscal policy sins” that he believes will lead to the onset of rampant inflation.