Several members of the of the Federal Reserve Open Market Committee expressed misgivings at the last meeting about the central bank’s aggressive and open ended monetary support for the U.S. economy and the potential risks if it is prolonged, though the committee as a whole viewed those dangers as 'manageable' for the time being.
This is the third FOMC meeting where doubts about the Fed’s so called "Q Eternity' liquidity provision of $85 billion a month in purchases of mortgage backed securities and Treasuries have been mentioned in the minutes.
"In particular, participants pointed to possible risks to the stability of the financial system, the functioning of particular financial markets, the smooth withdrawal of monetary accommodation when it eventually becomes appropriate, and the Federal Reserve's net income," the minutes of the March 19th-20th meeting stated.
Despite the concerns about future inflation, spiking interest rates and asset bubbles, the yield on the benchmark 10-year Treasury has fallen from 2.06% on March 13th, the week before the meeting to 1.78% today.
A number of unexpectedly poor U.S. economic statistics since the meeting, particularly non-farm payrolls and ISM numbers for March have highlighted the weak condition of the U.S. economy. Combined with the massive new liquidity being pumped into the Japanese economy by the Bank of Japing, some of which is expected to leak out into the world financial system seeking return, US Treasury bonds have rallied strongly, driving down yields.
Market reaction to the minutes was muted, with participates well aware that the committee concerns about Fed policy represent a minority opinion of the voting members and that the recently weak American statistics militate against any change in Fed policy.
The minutes were released earlier today than their regularly scheduled 2 pm ET time because they had been sent by mistake to some people yesterday afternoon.
For the first time in its history the Fed has tied its monetary policy to the achievement of specific statistical goals, a 6.5% unemployment rate or 2.5% inflation. With unemployment at 7.6% and 88,000 jobs in the latest non-farm payrolls and core inflation in the PCE Deflator at 1.3% in February neither seems likely to inhibit Fed policy measures in the near future.
Chief Market Strategist