Fed split as QE2 set to continue

Julian Harris
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DIVISIONS within the US Federal Reserve were exposed last night, with the news that senior officials clashed over the controversial second phase of quantitative easing – dubbed QE2.

“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year,” the March minutes of the Federal Open Market Committee (FOMC) said.

The minutes said that “a few” members warned that the size of the Fed’s balance sheet could lead to public doubt over its tightening credibility, and risk upward pressure on inflation expectations.

Those unnamed members’ hawkish views contrasted with those of “a few” other members, who argued that exceptionally loose policy could even continue beyond 2011.

Yet despite signs of a split, “almost all” participants felt that there was no case for the Fed’s asset-purchasing programme to be curtailed.

“The minutes suggest that the majority of officials want to see QE2 through to the end,” said Paul Dales of Capital Economics.

Positive words on the US recovery, plus the apparent commitment to continue with QE2, saw US treasuries fall.

Meanwhile, growth in the US service sector slowed in March, according to the ISM non-manufacturing survey released earlier in the day.