While it’s been coming for some time, the Federal Reserve’s decision to end its historic bond buying stimulus program is one to note. It’s the end of an era left over from the financial crisis.
Binyamin Applebaum had this story for The New York Times:
An upbeat Federal Reserve said on Wednesday that the economic recovery was chugging along and that it would end its latest-bond buying campaign on schedule at the end of the month.
The Fed, in a statement issued after a two-day meeting of its policy-making committee, said the bond-buying program had served its purpose by contributing to stronger job growth. The Fed also upgraded its appraisal of labor market conditions, saying that “underutilization of labor market resources is gradually diminishing.”
But it added that it still planned to keep short-term interest rates near zero for a “considerable time.”
The statement from the Fed’s policy making committee, led by Janet L. Yellen, the Fed chairwoman, acknowledged the recent weakness in some measures of inflation expectations and the drop in energy prices. But it said the likelihood of persistently low inflation had actually diminished since earlier this year. The Fed noted that survey-based measures of expectations, which are less subject to distortion, had remained relatively stable.
The Wall Street Journal story by Jon Hilsenrath said the move indicated the Fed was happy with the strength of the U.S. economy:
Taken together, the moves mark a vote of confidence by the Fed in the U.S. economy, which appears to have grown at a pace near 3% or more in the third quarter. That’s a much better performance than in Japan and Europe and a hopeful sign for the world economy as growth in China appears to be flagging.
Pointing to “solid job gains” and a falling unemployment rate, the Fed said a range of labor-market indicators suggest that labor-market slack is “gradually diminishing.” In the process it struck from the statement an earlier assessment that labor-market slack was substantial, a phrase investors have been watching closely for signs the Fed is becoming more confident about the economy.
Ylan Q. Mui wrote for The Washington Post that the Fed stuck to its policies despite criticism:
The decision to stop pumping money into the economy is expected to come when Fed officials wrap up their two-day meeting in Washington on Wednesday. The program, known as quantitative easing, was originally intended to be a one-time injection of money into a financial system in shock during the darkest days of the crisis in 2008. But over the past six years, the central bank has turned to the program to try to remedy everything from lackluster hiring to a moribund housing market.
The Fed’s continued reliance on the program highlights not only its commitment to lifting the economy, but also its misjudgments earlier on. The central bank was too optimistic about the recovery, and paused quantitative easing twice only to decide later that its earlier efforts had been too modest.
“In 2008, 2009, I did not expect this,” said Don Kohn, who was then vice chairman at the Fed and now is a senior fellow at the Brookings Institution. “I didn’t really anticipate the need to continue doing more.”
Still, Fed observers credit the central bank, first under Chairman Ben Bernanke and now led by Chair Janet Yellen, with ultimately sticking with its efforts to lift economic growth. Critics said the measures would undermine the dollar in global currency markets and unleash a wave of inflation, but neither has happened. Indeed, inflation has run below the Fed’s 2 percent target.
“It’s not been distracted by the criticism,” said Paul Sheard, chief global economist at ratings company Standard & Poor’s. “You sometimes may lose a little bit of nerve. They stuck to it.”
The Huffington Post’s Mark Gongloff wrote that the Fed didn’t seem to be too worried about low inflation:
Still, in announcing its decision, the Fed sounded fairly optimistic about the economy, noting the job market’s recent good news and saying that consumers and businesses have been slowly increasing their spending.
The Fed also chose to look on the bright side of one ominous development in the economy: Inflation is still lower than the Fed would like it. Low inflation might sound great to people dealing with rising food prices, but if prices generally stay too low for too long, that risks “deflation,” or falling prices. When deflation happens, people stop spending while they wait for prices to fall further, and the economy suffers. See Japan in the 1990s or the U.S. during the Great Depression.
The Fed kept pumping stimulus into the economy in one way: It kept its target for a key short-term interest rate near zero and promised to keep it there for “a considerable time.” This interest rate, the federal funds rate, which influences other borrowing costs throughout the economy, is the Fed’s traditional policy tool for slowing down and speeding up the economy.
When zero-percent interest rates weren’t enough to help an economy gutted by the financial crisis and Great Recession, the Fed turned to the extraordinary measure of buying up bonds to drive interest rates even lower. That bond-buying has left the Fed with a balance sheet worth $4.48 trillion, up from less than $1 trillion before the crisis.
It’s definitely the end of an era and one that shouldn’t surprise anyone since the timing has been broadcast for a while now. What is good news is that investors should have some confidence the U.S. economy continues to grow and remain strong. After a volatile month, this might help settle things down.
