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Fed Minutes Indicate Intense Debate Over Expanded Asset Purchase Plan

fadbldg 062309 23Nov10

While the Federal Reserve's decision to expand its asset purchase program was nearly unanimous, the minutes of the November meeting of the Federal Open Market Committee showed that there was considerable debate regarding the quantitative easing plan.

Following the two-day meeting earlier this month, the FOMC, the policy-setting arm of the Fed, said that it had decided to expand its holdings of securities in order to promote a stronger pace of economic recovery and to help ensure that inflation is at levels consistent with its mandate.

In addition to maintaining its existing policy of reinvesting principal payments from its securities holdings, the FOMC said it plans to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

The minutes of the meeting showed that most of the participants determined that the expanded asset purchase program would put downward pressure on longer-term interest rates and boost asset prices, with some also noting that it could lead to a drop in the value of the U.S. dollar.

"Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee's mandate," the minutes said.

However, some participants predicted that the expanded asset purchase program would have only a limited effect on the pace of the recovery, judging the slow economic growth to largely be the result of factors that would not respond to additional monetary policy stimulus.

The minutes noted that several participants also saw a risk that increasing the size of the Fed's asset portfolio could cause an undesirably large increase in inflation.

Nonetheless, it was determined that the FOMC had the tools in place to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation.

In its accompanying statement, the FOMC noted that it would regularly review the pace of its securities purchases and the overall size of the asset-purchase program. The FOMC indicated that it could adjust the program based on incoming economic data.

The committee subsequently voted 10-1 in favor of expanded the asset purchase program, with Kansas City Fed President Tom Hoenig the lone dissenter.

Hoenig voted against the plan due to his assessment that the risks of additional purchases of Treasury securities outweighed the benefits.

The minutes noted that Hoenig also believed that additional purchases would risk a further misallocation of resources and future financial imbalances that could destabilize the economy. He also saw the potential for the plan to undermine the Fed's independence and cause long-term inflation expectations to rise.

At the meeting, the Fed also decided to maintain the target for the federal funds rate at zero to 0.25 percent and reiterated that economic conditions are likely to warrant exceptionally low rates for an extended period.

The FOMC has left interest rates unchanged in the zero to 0.25 percent range since lowering rates to that record low level in December of 2008.

The minutes of the meeting also showed that the members of the FOMC downwardly revised their estimates for GDP growth in 2010 and 2011 compared to the estimates provided in June. The committee members also forecast higher unemployment.

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