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Federal Reserve sees stimulus exit in October, according to minutes

WASHINGTON -- The Federal Reserve plans to end bond purchases in October, winding up a five-year stimulus effort to support the U.S. economy, central bank June meeting minutes showed Wednesday.

Participants of the June 17-18 Federal Open Market Committee meeting saw the economy rebounding from a weak first quarter, largely blamed on bad weather.

“If the economy progresses about as the Committee expects ... this final reduction would occur following the October meeting,” the minutes said.

Though the Fed previously has indicated it would end asset purchases by year-end, this was the first time an explicit month has been named. Most Fed-watchers had expected the buying to end in October.

The FOMC has been tapering the quantitative easing program in incremental steps of US$10 billion this year, bringing monthly bond purchases down from US$85 billion in December to US$35 billion in June.

After US$10 billion cuts expected from each of its July and September meetings, the policy makers agreed a final US$15 billion reduction could be decided in October.

The committee expects it would not begin raising its near-zero benchmark interest rate for “a considerable time” after the asset purchase program ends, “especially if projected inflation continued to run below the Committee's 2 percent longer-run goal.”

Though asset purchases end, the Fed still will continue to reinvest the funds from the bonds it holds. The minutes said that “many” participants agreed that ending reinvestments at or after the time of raising rates would be best, with “most” of them preferring to end them “after liftoff.”

The minutes, and the timing of the last bond purchases, reaffirmed the Fed's expectations that a rate hike would not come before mid-2015.

Policymakers at the meeting weighed evidence that inflation had moved up recently from low levels earlier in the year toward the central bank's 2.0 percent target.

The Fed's preferred inflation measure, the personal consumption expenditures price index, has climbed for three straight months, hitting a 1.8 percent gain in May from a year ago.

Some officials were worried that inflation was heating up, while others expressed concern about the persistence of below-trend inflation in the economy, still struggling to recover five years after the end of the Great Recession.

Markets Rally Concerns

Policy makers also appeared concerned about the strong run-up in the stock markets, the minutes showed, with a discussion on “whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions.”

Citing that reason, they agreed that the Fed should emphasize in its communications that its policy decisions depend on the evolution of the economic outlook.

The potential impacts of developments abroad on U.S. monetary policy were also discussed.

A couple of officials noted moves toward more accommodative policies by the European Central Bank and the Bank of Japan had boosted the economic growth outlook for those areas, potentially helping U.S. inflation return to the Fed target.

“Several others, however, remained concerned that persistent low inflation in Europe and Japan could eventually erode inflation expectations more broadly,” the minutes said.

“And a couple of participants expressed uncertainty about the outlook for economic growth in Japan and China.”

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