Some Federal Reserve policymakers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking, according to minutes of their June meeting.
"Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy," the minutes showed.
Fed officials expressed concern about low volatility in equity, currency and fixed-income markets. At the same time, "it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion," according to the minutes of the June 17-18 Federal Open Market Committee meeting released Wednesday in Washington.
Officials also agreed that their bond-purchase program would end with a final reduction of $15 billion in buying at their October meeting if the economy progresses as they expect. At its June meeting, the committee continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a fifth-straight meeting, to $35 billion.
Stocks pared gains after the minutes were released.
Central bankers also continued discussions of a strategy for the eventual exit from unprecedented monetary easing. "It was observed that it would be useful for the committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate."
Many participants agreed that it "would be best" for the Fed to end reinvestment of maturing securities only when it raises rates for the first time since 2006, or even afterward. Most preferred to end after.
Fed officials are closing in on their goal of full employment faster than they had forecast, forcing them to consider accelerating their first increase in the main interest rate in eight years. The Fed has said rates are likely to remain low for a "considerable time" after it ends large scale asset purchases that are set to wind down by year's end.
Fed officials said in a statement after the June gathering that the economy is rebounding and will continue to expand at a moderate pace.
Fed Chairman Janet Yellen repeated at her news conference after the meeting that the Fed is likely to "reduce the pace of asset purchases in further measured steps." Bond buying has boosted the central bank's balance sheet to a record $4.38 trillion.
Better-than-expected employment data are bringing forward expectations for higher rates. Unemployment fell to an almost 6-year low last month, strengthening the case for officials to raise the main rate earlier than they had forecast.
Changes in the federal funds rate are the Fed's primary lever for influencing the economy. The benchmark rate directly influences other short-term rates, such as the prime rate and credit-card rates.
However, the Fed's bigger influence on the economy flows from its monetary policy's effects on long-term borrowing costs, such as rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets.
Payrolls surged in June by 288,000 workers, according to a Labor Department report released last week. The unemployment rate fell to 6.1 percent, a level that policymakers didn't expect to see before the end of the year.
Fed officials predicted at their June meeting that unemployment would decline to 6 percent to 6.1 percent by the end of this year. It was 6.3 percent in April and May.
Central bankers last month also raised their forecasts for interest-rate increases. They estimated the main rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later. In March, they forecast 1 percent at the end of next year and 2.25 percent in 2016.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, pulled forward his forecast for Fed tightening by one quarter, to the third quarter of 2015, after the jobs report. Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ Ltd. now expects the first rate increase next March instead of June.
St. Louis Fed President James Bullard said June 26 that he favors raising the benchmark rate in the first quarter. "The economy could tolerate at least a little bit of the central bank getting back to a more normal stance," Bullard, who doesn't vote on policy this year, said in New York.
Business on 07/10/2014