FED debated reeling in stimulus spending minuted

Federal Reserve policymakers debated whether to reduce monetary stimulus in September and wondered if standing pat would damage their communications strategy, according to the minutes of the meeting released Wednesday.

Participants in the September 17-18 Federal Open Market Committee meeting also expressed concern about the negative impact of higher interest rates on the housing recovery, one of the few bright spots in the economy.

Markets were shocked when the FOMC announced the central bank would leave unchanged its $85 billion a month in asset purchases, or quantitative easing, because the economy too weak to withstand a reduction of the support.

Since May the Fed had suggested it would taper the stimulus this year if economic conditions allowed, a signal that markets interpreted as tighter credit, driving up interest rates, including mortgage rates that apparently discouraged home buying.

"During the exchange of views on whether to trim the flow of asset purchases at this meeting, a number of members emphasized the contingent and data-dependent nature of the Committee's purchase program," the minutes said.

"In light of the mixed data recently, including inflation readings that remained below the Committee's longer-run objective, and the concerns over near-term fiscal uncertainties, some members indicated that they preferred to await more evidence that their expectation of continuing improvement would be realized."

With many experts and markets expecting the Fed would reduce asset purchases at the meeting, the minutes said, "some participants emphasized a need to clearly communicate the rationale behind any decision not to do so, in order to avoid conveying a message of pessimism regarding the economic outlook or to reinforce the distinction between decisions concerning the pace of purchases and those concerning the federal funds rate."

"It was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications."

The minutes reflected officials' concerns about the tightening of financial conditions in recent months and its effects on the housing sector and on the broader economy.

"Moreover, the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee's willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy."

vs/pmh