U.S. Federal Reserve committee members feared that the impact of quantitative easing was diminishing over time when they made the decision in December to begin tapering the central bank’s stimulus program.

Minutes released Tuesday show that most members of the Fed’s powerful open market committee believed the monthly program of buying $85 billion in U.S. bonds was having the desired impact of keeping rates low.

But they had reservations.

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment,” the minutes say.

There was also concern over the money pouring into the investment markets because of the program, with members saying it “could provide an incentive for excessive risk-taking in the financial sector.”

Asset bubble concern

“In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some small-cap stocks, the increased level of equity repurchases, or the rise in margin credit,” the minutes say.

Critics of the Fed bond-buying program have said it is causing a stock market bubble.

Participants worried the Fed decision to reduce the bond-buying program by $10 billion at month to $75 billion would be interpreted by  financial markets as a step toward raising its key short-term interest rate.

In response, the Fed said it would keep its short-term rate low "well past" the time the unemployment rate dropped below 6.5 per cent, as long as inflation stay low.

Unemployment, currently around 7 per cent, remains a key concern for the U.S. central bank. Some members wanted to lower the unemployment threshold to 6 per cent, but most favoured basing their tapering decisions on a range of indicators, not just the unemployment rate.

Jobs numbers tipped balance

In the end, the improving jobs numbers in the U.S. tipped the balance for the committee. However, it is worried that inflation is so much below the two per cent target.

The process of tapering has raised yields on U.S. bonds, but the Fed seems less worried about that now than it was in September, according to CIBC economist Avery Shenfeld. Higher yields on bonds could lead to U.S. homebuyers facing higher long-term rates.

“The FOMC members felt that housing could grow despite the run-up seen in mortgage rates,” Shenfeld said.

There was disagreement among committee members about what steps the Fed should take to continue its tapering program throughout 2014.

While the committee decided on a modest initial reduction, some participants would have preferred a larger reduction and setting a pace that would close the bond-buying program relatively quickly. Still others proposed the Fed lay out its path for winding down the stimulus plan so there is less uncertainty over the coming months.  

Fed chair  Bernanke will preside at his last meeting on Jan. 28-29 and incoming chair Janet Yellen is expected to take over on Feb. 1.

Yellen has been a strong supporter of Bernanke's aggressive efforts to revive the economy following the Great Recession.