08/21/2013 03:08 EDT | Updated 10/21/2013 05:12 EDT

Fed seems on track to slow bond buying by year's end but remains split on timing, minutes show

WASHINGTON - The Federal Reserve appears on track to slow its bond purchases by the end of this year if the economy continues to improve. But it remains divided over the exact timing of the move.

That's the message from the minutes of the Fed's July 30-31 meeting released Wednesday.

A few policymakers said they wanted to assess more economic data before deciding when to scale back the central bank's $85 billion a month in Treasury and mortgage bond purchases. Others said it "might soon be time" to slow the purchases, which have helped keep long-term rates near record lows.

Since the July policy meeting, a few Fed officials have suggested that the central bank could slow the bond buying in September. By then, updated reports on U.S. employment and economic growth will have been issued.

The Fed is considered most likely to slow its bond buying after its September or December policy meeting because after each one, Chairman Ben Bernanke will hold a news conference and could explain such a major step.

The Fed holds eight policy meetings a year; four include news conferences by the chairman. Besides September and December, the Fed will also meet in October before the year ends.

In June, Bernanke signalled that the Fed would scale back its purchases later this year as long as the economy continued to improve. And he said the purchases would likely end by the middle of 2014, when the Fed expects the unemployment rate to be around 7 per cent. It's now 7.4 per cent.

Since then, investors have focused on when the Fed might begin to slow its purchases. Stocks have fallen on speculation that the Fed is moving closer to pulling back on the bond buying.

The yield on the 10-year Treasury note has surged about three-quarter of a percentage point, pushing up rates on mortgages and other loans. The average rate on a 30-year mortgage has risen about a full point since May to 4.4 per cent.

The minutes released Wednesday show that Fed policymakers agreed that they wouldn't raise the short-term interest rate they control from a record low near zero at least until the unemployment rate fell to 6.5 per cent. Several members even said they were willing to lower that threshold.

The release of the minutes initially rattled Wall Street as investors digested members' thoughts on the bond purchases, the short-term rate policy and the Fed's characterization of the economy.

The Dow Jones industrial average had been down about 50 points before the minutes were released at 2 p.m. EDT. It fell more than 100 points afterward but recovered later to post slight gains.

Bond yields increased, though. The yield on the 10-year Treasury note rose to 2.86 per cent from 2.81 just before the minutes were released.

Some policymakers said they were less confident than they were at the June meeting that economic growth will pick up later this year. They cited higher mortgage rates, slower growth overseas and the potential for continuing cuts in government spending as the main reasons.

But several said they thought the housing market would continue to recover despite higher rates. If so, that would provide an important boost to the economy. The Fed officials said banks have become more willing to provide mortgage loans, consumer confidence has increased and mortgage rates are still low by historical standards.

Fed officials generally agreed that the risks of an economic downturn have diminished since the Fed began the bond purchases in September.

Since the meeting, the data on the job market have been mixed.

Employers added 162,000 jobs in July. That was the fewest in four months. Still, the economy has created an average of 192,000 jobs a month this year, slightly ahead of last year's pace.

The unemployment rate has fallen to a 4 1/2-year low of 7.4 per cent. That's down from 7.8 per cent in September.

Much of the job growth has been because the number of people seeking unemployment benefits has fallen to its lowest level in five years. That suggests that companies are laying off few workers and may step up hiring in coming months.

The economy is still expanding at a sluggish pace, however, raising concerns about whether companies will remain confident enough to keep hiring. The economy grew at an annual pace of just 1.7 per cent in the April-June quarter.

The Commerce Department will update its estimate of second-quarter growth next week. Many economists expect it to be revised to above 2 per cent.

Inflation, while modest, has moved back to the Fed's target of 2 per cent after slowing to an annual pace of just 1.1 per cent in April. Mild inflation is consistent with at least some economic growth.