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Fed minutes signal possible changes

Federal Reserve Building
Federal Reserve Building

Members of the Federal Open Market Committee in January discussed further tapering of their bond-buying program and possible changes in monetary policy, according to minutes of the January meeting released Wednesday.

Tapering began in January, dropping to $75 billion from $85 billion in monthly purchases, and then dropped again, to $65 billion, in February.

Most FOMC members viewed the risks to the economic outlook and labor markets as more balanced in recent months, despite the downside risks of recent problems in emerging markets economies, the minutes show.

Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income, said the “disjunction” between the latest economic data and FOMC members' thinking revealed in the minutes will prove a challenge for new Federal Reserve Chairwoman Janet Yellen. “What the minutes reflect is the fact that there are a lot of members of that committee that think growth is going to accelerate in 2014. If the economy is slowing and warrants a change in their forward guidance, that's going to be a task for Janet Yellen to turn the boat and adjust their sails,” Mr. Tipp said.

“These minutes reflect a tone that was prevalent last year, insensitivity to some of the slower data coming in. I think we're going to see that change,” Mr. Tipp said.

With the unemployment rate close to 6.5%, FOMC members agreed “it would soon be appropriate” to change forward guidance on the federal funds rate, with a few members raising the idea of increasing the rate “relatively soon,” even if the unemployment rate does not drop. But Rick Rieder, managing director, chief investment officer of fundamental fixed-income portfolios at BlackRock (BLK), sees that taking more time. “Clearly, there is a debate going on and the debate is going to continue,” he said. Mr. Rieder said he thinks the FOMC eventually will move away from quantitative thresholds toward qualitative economic issues, which “gives the Fed more flexibility and allows them to respond to market conditions,” he said.