Published: Tue, 07 Apr 2009 20:26:49 +0200

U.S. Preview: FOMC Minutes to Show Lively Debate Over Bond Purchase Plan

(CEP News) - Markets will pore over the FOMC minutes from the March 17-18 meeting to take stock of the undoubtedly interesting debate that led to the surprise decision to buy $300 billion in long-term Treasuries.

The unanimous vote came as a shock to many market participants, who felt the move was not warranted given current economic conditions, and particularly given the near-unanimous decision at the previous meeting in January not to purchase U.S. debt.

Also, both Ben Bernanke and Fed member Jeffrey Lacker had downplayed the idea leading up to the meeting.

"The prospect for this radical policy shift to aggressive QE and modest monetization probably prompted fascinating debate among the FOMC members, making the Minutes a must read," said Michael Gregory, economist at BMO Capital Markets.

Other initiatives introduced at the last meeting included the purchase of an additional $750 billion in mortgage-backed securities, $100 billion in agency debt and a likely expansion of the Term Asset Backed Security Lending Facility (TALF) to support consumer and small business loans.

The implementation of these additional measures might have been what convinced Fed Chairman Ben Bernanke to agree to the $300 billion bond purchase plan, according to Paul Ashworth, economist with Capital Economics. He said the agreement would have convinced more hawkish members of the committee to vastly expand the Fed's other credit programs.

This theory is backed up by the fact that leading up to the meeting, "Ben Bernanke appeared to be very deliberately downplaying the possibility that the Fed would purchase Treasury bonds, preferring instead to concentrate on its existing programs that targeted private credit markets directly," said Ashworth.

Ashworth said the board might also have been influenced by the Bank of England's decision to buy debt just days earlier, which saw 10-year gilt yields fall 50 basis points. However, he added, the reaction in U.S. yields following the FOMC decision has since reversed more than half the initial drop. "There's no reason why the Fed can't up the stakes," he said.

While some disagreement among members is expected to be apparent in the minutes, David Resler, economist with Nomura, said most members probably would agree with recent comments made by Federal Bank of San Francisco President Janet Yellen, who said, "uncertainties created by the financial crisis called for a "'diversified array of effective fiscal and monetary policy programs,'" he said.

Resler noted the FOMC monetary policy statement was overwhelmingly pessimistic on the outlook for the U.S. economy, despite the recent stabilization of key indicators.

"We will be reading the minutes closely for any sign that the committee also sees in the data the "green shoots" that appear to be boosting the market," he said.

The FOMC minutes will be released at 2 p.m. EDT Wednesday.

By Megan Ainscow, mainscow@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca