Posted By thestatedtruth.com on January 6, 2010

Jan. 6 (Bloomberg) — Federal Reserve officials last month debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their last meeting showed.

Policy makers also differed over whether risks are greater that inflation will speed up or slow down too much, the Fed’s Open Market Committee said today in minutes of its Dec. 15-16 meeting in Washington. Some officials said “quite elevated” slack in the economy would damp prices, while others saw a risk of faster inflation from the Fed’s “extraordinary” stimulus, the central bank said.

Fed Chairman Ben S. Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery and reduce unemployment, which is now close to a 26-year high.

“To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place,” the minutes said.

“A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the committee’s large-scale asset purchases and continuing them beyond the first quarter,” especially if the economic outlook or mortgage market deteriorated, the minutes said.

One member said the Fed could reduce planned asset purchases because of improvement in financial markets and the economy, and “that it might become appropriate” to start reducing asset holdings “if the recovery gains strength over time,” according to the report.

The Fed is buying $1.25 trillion of mortgage-backed securities issued by housing-finance companies Fannie Mae, Freddie Mac and federal agency Ginnie Mae. The central bank began the program in January 2009.

The Fed separately purchased $300 billion of Treasury securities from March through September 2009 and is buying, through March, $175 billion of corporate debt issued by government-backed Fannie and Freddie and the government- chartered Federal Home Loan Banks.

Some officials said there was a risk that the end of Fed purchases and federal homebuyer tax credits may “undercut” improvements in the housing market, the minutes said.

Officials “generally thought the most likely outcome” was for economic growth to “gradually strengthen over the next two years,” helping reduce joblessness and slack. Still, the “weakness in labor markets continued to be an important concern,” the Fed said.

Fed staff economists “modestly increased” their forecast for economic growth in 2010 and 2011, predicting a “very gradual reduction in economic slack,” the minutes said without giving specific figures.

At the same time, Fed officials “noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching,” the central bank said.

Meeting participants also approved a suggestion by open market desk officials to not reinvest the proceeds from maturing agency debt or prepayments on mortgage debt as an interim approach pending further discussion.

More……….http://www.bloomberg.com/apps/news?pid=20601087&sid=ah8T1oCq1IkA&pos=1

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