FOMC Weighs Marginal Costs and Benefits of Quantitative Easing

Economic Pulse
January 9, 2014
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The minutes from the Federal Reserve’s December 17-18 meeting, released yesterday, revealed a wide set of opinions with regard to the effectiveness and associated costs of the asset purchase program.

Despite the many—and often conflicting— views of the participants, at least a “majority” judged that the “marginal efficacy of purchases was likely declining as purchases continue,” even as “some noted the difficulty inherent in making such an assessment.” Additional comments from the Federal Open Market Committee (below) suggested that on balance, the benefits of asset purchases were beginning to be outweighed by the purchases’ potential to negatively impact risk-taking.

With an improvement in economic conditions (participants noted that “that the economy was expanding at a moderate pace” and that “financing conditions in commercial real estate markets were consistent with increased confidence”) Studley sees further declines in asset purchases over the coming months, similar to the $10 billion reduction to purchases announced last month.

FOMC Participant Comments on Quantitative Easing from the meeting

Reasons to reduce the current page of QE

  • A reduction was “consistent with the Committee’s previous policy communications” and “progress to date [from QE] had been meaningful.”
  • “The criterion of substantial improvement in the outlook for the labor market was likely to be met in the coming year if the economy evolved as expected.”
  • “Most members agreed that the cumulative improvement in labor market conditions and the likelihood that the improvement would be sustained indicated that the Committee could appropriately begin to slow the pace of its asset purchases at this meeting.”
  • "Partcipants were most concerned about the marginal cost of additional asset purchases arising form risks to financial stability, poinoing out that a highly accomodative stance of monetary policy could provide an incentive for escessie resk taking in the financial sector... risks to financial stability could be somewhat larger in teh case of asset purchases... because purchases work in part by affective term premiums and policymakers have less experience with term premium effects than with more conventional interest rate policy"

Reasons to maintain the current pace of QE

  • A still “elevated” unemployment rate and “a range of other indicators [that] had shown less progress toward levels consistent with a full recovery in the labor market.”
  • A “projected pickup in economic growth was not assured.”
  • “Some also expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.”
  • “In the view of one member, a reduction in the pace of purchases was premature and…the Committee should wait for more convincing evidence that economic growth was rising faster than its potential and that inflation would return to the Committee's 2% objective.”