Washington • There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control, according to an official account of the Fed’s most recent meeting in January.
An increasingly vocal minority of Fed officials are concerned that buying $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse.
But the Fed’s policymaking committee reiterated its determination in January to hold course until there is “substantial improvement” in the outlook for job growth, and several officials cautioned at the January meeting that the greater risk to the economy was in stopping too soon, according to the account, which was published after a standard three-week delay.
“A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment and price stability,” it said. “They also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions.”
Proponents of strong action to reduce unemployment, led by Fed Chairman Ben Bernanke, raised for the first time the possibility that the Fed should maintain a portion of its asset holdings even as the economy recovers, because doing so could magnify the benefits. Its holdings now total almost $3 trillion.
The meeting account shows that Fed officials generally expected a slow improvement in economic conditions and were not overly concerned that the economy did not expand, or expanded only modestly, in the final months of 2012. While they anticipated additional cuts in federal spending, the risk that the federal government would drag the economy back into recession also faded.
The high rate of unemployment remained the primary concern for most of the 19 Fed officials who participate in the regular meetings of the Federal Open Market Committee.
The Fed’s vice chairwoman, Janet Yellen, reiterated her strong support for asset purchases in a speech this month. Noting that inflation remained low and steady, while unemployment remained stubbornly high, Yellen said it was “entirely appropriate for progress in attaining maximum employment to take center stage in determining the Committee’s policy stance.”
Some Fed officials have expressed growing unease that, even if inflation remains under control, asset purchases may disrupt financial markets. One concern is that low interest rates will encourage excessive risk-taking, inflating new asset bubbles that will inevitably pop. The Fed’s purchases also may disrupt the normal operations of financial markets by constraining the supply of safe assets.
Jeremy Stein, a Fed governor, said this month that he saw “a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” referring to a rise in the sale of new junk bonds, or high-risk corporate debt.
Stein said he did not see any reason for an immediate change in Fed policy, but Esther George, president of the Federal Reserve Bank of Kansas City, cited similar concerns in opposing the current policy at the January meeting.
The Fed could be fortified in its current policies if Congress continues to cut spending. Another round of cuts is scheduled to take effect March 1. The Congressional Budget Office estimated that the cuts would reduce growth by 0.6 percentage points this year and employment by about 750,000 jobs.
“I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past,” Yellen said in her recent speech.
Fed officials, however, have cautioned that they are not likely to respond to such cuts by increasing their efforts, because they are increasingly concerned that the potential costs of additional action would outweigh the benefits.