Federal Reserve grappling with when to end stimulus program

New minutes from the Federal Reserve show central bank officials grappling with exactly when and how the Fed should exit from its massive stimulus efforts.

The minutes detailing talks of the Fed's meeting at the end of January show officials trying to decide whether to continue monthly bond purchases of $85 billion, and with what exactly the Fed should be doing to support a steady but slow economic recovery.

"Several" members of the Federal Open Market Committee (FOMC) argued in January that the Fed should be prepared to vary the speed at which it is buying bonds in response to the trajectory of the economy or the effectiveness of the policy.


Currently, the Fed has committed to buying $85 billion of bonds a month until it sees either substantial improvement in the labor market or a spike in inflation. To be more precise, the FOMC has said its policies would likely remain in place until the unemployment rate fell below 6.5 percent or inflation climbed above two percent.

But the minutes show a number of participants warning that the Fed may be forced to reduce or halt those purchases well below those thresholds if further evaluation of the policy's effectiveness and risks were to change. 

Many members "expressed some concerns" about the possible costs and risks of the purchases, warning of "possible complications" that could come when the time came to unwind the Fed's expanded portfolio. The Fed could suffer "significant capital losses" when it came time to sell off the bonds, while others worried the massive sell-off could distort financial markets.

Several participants also fretted that the Fed's policy, aimed at bringing down long-term interest rates, could encourage "excessive risk-taking and adverse consequences for financial stability."

At the same time, others argued there is ample risk in ending a policy too soon, noting past times when the Fed pulled accommodative policy too soon and the economy suffered. They also noted that an early exit could undercut the Fed's heightened efforts to more clearly communicate its policy moves.

Markets dropped after the minutes were released, with the Dow Jones down nearly 100 points at 3:15 p.m.

The debate comes as the Fed continues to face steady pressure from congressional Republicans about its accommodative policy. Following its last meeting, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) warned high inflation could be on the way thanks to the Fed, and that its monetary policy is covering "a multitude of fiscal policy sins."

Bernanke is slated to testify before Hensarling's committee next week.

At the end of its January meeting, the Fed opted to stay the course on its current policy of near-zero interest rates and $85 billion of monthly bond purchases. The decision came in the face of a disappointing report from the Commerce Department, which found the economy actually shrank by 0.1 percent in the fourth quarter of 2012.

However, the Fed minutes show officials believing the economy, aside from some "temporary factors," is still moderately growing. While not expanding fast enough for their liking, Fed officials say the economy is still making steady gains while risks to the recovery appear to be warning.

One such risk averted was the "fiscal cliff." Fed officials slightly upgraded their expectations for economic growth after Congress struck a deal to avoid most of the expiring tax cuts and automatic spending cuts, saying the compromise was "slightly less restrictive" than staff had assumed.

This story was updated at 3:17 p.m.