All it took were several references to “several participants” wondering about the costs of additional quantitative easing to send the Dow Jones Industrial Average down 108 points yesterday.
The participants in question are members of the Federal Reserve’s Open Market Committee. Minutes of the committee’s Jan. 29-30 meeting were released yesterday.
The discussion of the costs and benefits of the Fed’s $85 billion-a-month bond-buying operation seems to be picking up more votes for the costs outweighing the benefits with each passing meeting. The doves, including Fed chief Ben Bernanke, Fed vice chair Janet Yellen and New York Fed President Bill Dudley, still think the harm to society from a prolonged period of high unemployment justifies the cost.
The hawks are either gaining critical mass or talking louder. (It’s hard to tell which one because the minutes use qualitative terms, such as “several,” “some” or “many” participants.) Among their concerns are the risk of inflation; the possibility of disrupting the normal functioning of the Treasuries and mortgage-backed bond markets with the Fed’s purchases; potential losses on its huge securities portfolio when interest rates start to rise; and the risk of risk-taking, which could pose a threat to financial stability.
Of course, risk-taking is exactly what the Fed has been encouraging the public to do. As I wrote in a column last week, Bernanke explains the transmission of monetary policy as working through the public’s purchase of riskier assets once the Fed has cut the overnight rate to zero and depressed the yield on long-term Treasuries through outright purchases.
It seems to be working. “Investor appetite for risk had increased,” the minutes note.
Some analysts said the minutes reflected a sea change in Fed thinking. I view them as a slight adjustment to the tiller. For forward-looking markets, the suggestion that the Fed might, as the minutes put it, “vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchase evolved,” may have been enough to warrant caution.
Market participants forget that the Fed is neither omniscient nor a very good forecaster. What it is is the sole proprietor of the printing press. If the hint of cutting back on its hours of operation is enough to frighten the stock market, then the Fed really has to be concerned by what it hath wrought.