Coverage: Fed standing strong

The Federal Reserve Board is sticking with its current stimulus and interest rate policy, according to a statement released Wednesday. It cited unemployment as the main reason for the decision.

Binyamin Applebaum had this story for The New York Times:

The Federal Reserve stuck with its commitment to its stimulus campaign Wednesday, rejecting the argument it should begin to pull back more quickly, even as it detailed plans for an eventual increase in interest rates.

The Fed, in a statement released after a two-day meeting of its policy-making committee, said that the economy continued to improve, but that the central bank’s help is still needed.

“There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger,” the Fed’s chairwoman, Janet L. Yellen, said at a news conference Wednesday.

The Fed said it would continue to wind down its bond-buying campaign, adding just $15 billion to its holdings of Treasury and mortgage-backed securities next month. But it added that it planned to continue the centerpiece of its campaign, holding short-term interest rates near zero, for a “considerable time,” maintaining language it has used before in describing its strategy.

But Jon Hilsenrath reported for The Wall Street Journal that the Fed was making steps – although small – to end the bond-buying program:

The Fed said it would said it would end the bond-buying program known as quantitative easing in October, but retained its guidance that short-term interest rates will remain near zero for a “considerable time” after that program ends.

Under the plan, the Fed will purchase $15 billion of mortgage and Treasury bonds in October and then make no purchases in November.

Additionally, the Fed put out new details on how it would manage the mechanics of interest-rate increases once the time arrives. The “exit strategy” introduces instruments that will help the Fed move short-term rates once officials decide the economy can manage tighter credit.

By laying out its exit strategy and announcing its plan to end its bond-purchase program, the Fed showed it is prepared to raise rates when the time comes. But Chairwoman Janet Yellen stressed in a press conference Wednesday that the exit plan “is in no way intended to signal a change in the stance of monetary policy.”

Many investors expect the central bank to start raising rates in the summer of next year. But Ms. Yellen repeated her warning that Fed officials could move sooner than expected if the labor market and inflation readings improve faster than they forecast, and could wait longer to move if the economy disappoints.

The Washington Post reported in a story by Ylan Q. Mui that the Fed’s balance sheet will also remain the same size:

The improving outlook means that the recovery no longer needs as much support from the nation’s central bank. Since the start of this year, the Fed has been slowly reducing the amount of money it is pumping into the economy. The central bank said Wednesday it will reduce its purchases of Treasuries and mortgage-backed securities to $15 billion in October, down from $85 billion a month last year. The Fed expects to end the program altogether when it meets next month.

Still, the Fed said it will maintain the size of its balance sheet for now —which stands at $4.4 trillion — by reinvesting maturing securities. The Fed holds more than four times as many assets as it did before the 2008 financial crisis. Though the central bank said Wednesday it is committed to shrinking the balance sheet to a more normal size, it formally announced it does not plan to sell any of its assets, a reversal of the plan laid out three years ago.

Instead, the Fed said it will eventually stop reinvesting maturing securities and let them run off. However, the central bank said Wednesday that process will not start until after it has successfully raised its benchmark interest rate.

But as Reuters reported in a story by Rodrigo Campos, the market was happy with the Fed’s guidance:

The talk was that the Fed’s statement “will stay intact or along those lines. That seems to be what shifted the markets’ direction today,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

“Overall the language that’s there now has been positive for the (stock) market,” she said.

The Dow Jones industrial average rose 125.07 points, or 0.73 percent, to 17,156.21, the S&P 500 gained 17.44 points, or 0.88 percent, to 2,001.57 and the Nasdaq Composite added 34.08 points, or 0.75 percent, to 4,552.98.

The Dow hit a record at 17,167.05.

I still think the real question to all of this will be how the market and the economy will react once the stimulus is totally gone. It’s been well publicized, and the dates are all but written on a calendar, but that doesn’t mean investors are truly prepared.