Has the Fed Gone Wobbly on QE3?

New minutes show that some at the Fed are worried about inflation, unwinding a massive balance sheet.

Federal Reserve Board Chairman Ben Bernanke testifies before the House Financial Services Committee, Nov. 18, 2008.
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Federal Reserve meeting minutes are open to interpretation, but markets agree that they don't like what they see in the latest round of news from the Federal Reserve's Open Market Committee.

The Fed released minutes from its January meeting Tuesday, and the new information provided a more specific view of exactly how the members of the Fed's Open Market Committee, which sets interest rates, are feeling about the central bank's latest round of asset purchases, known as QE3. Under this program, the Fed is purchasing $85 billion in Treasuries and mortgage-backed securities every month.

The minutes show that, while members of the committee largely agree that asset purchases have been an effective stimulus, keeping interest rates low and boosting spending, those members also are starting to worry about potential long-term consequences.

[READ: Why a Clinton-Style Budget Miracle Won't Happen Again]

"Most participants commented that the Committee's asset purchases had been effective in easing financial conditions and helping stimulate economic activity," say the minutes...or, translated from Fedspeak, most members think that easing has been good for the economy.

But that support doesn't come without some reservations: "However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases."

The portion of the minutes devoted to discussing potential risks of the asset purchases was significantly longer than it was in December.

While minutes provide more specificity than the statements issued by the Fed at the end of each of its meetings, they still leave plenty up to the imagination. Because minutes do not specify who said what in any given meeting, dissecting the minutes is an art of parsing words like "many," "most," "several," and "a few" to catch a glimpse of exactly how strong or how soft members' support of current policies is.

For example, Fed-watchers learned that "a few" committee members are worried that loose policy will lead to medium- to long-term inflation risks. "Several" members worried about problems in unwinding a large balance sheet, and "several" also advised that the Fed should "be prepared to vary the pace of asset purchases" as it sees fit. Not that everyone is thinking about easing off; "several others" said that ending QE3 too soon could be too risky.

Despite the guesswork involved in understanding what Fed Chairman Ben Bernanke et al. will do next, Wall Street reacted with almost unanimous fear. When the Fed buys Treasuries, it lowers the yield on those bonds, sending investors elsewhere—into potentially more rewarding equities and commodities. But now that it looks like the Fed could soon be willing to let those yields inch up, it is creating anxiety in equity and commodity markets. The Dow Jones Industrial Average shed over 60 points at the news, with the S&P also falling more than 10 points. Gold also fell to a seven-month low.

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