The Federal Reserve said explicitly for the first time that it intends to end its extraordinary bond-buying program in October, enhanced clarity that represents a first step toward a lengthy and careful unwinding of years of unprecedented stimulus measures.
Most on Wall Street already had satisfied themselves that the Fed’s asset purchases would end at the conclusion of the Oct. 28-29 meeting of the central bank’s policy committee. The Fed steadily has been reducing its monthly purchases of Treasury debt and mortgage-backed securities by $10-billion (U.S.) at each meeting since December 2013. At that pace, the Fed will spend $15-billion under its quantitative easing policy in October.
Rather than allow any questions to linger, Fed officials decided at their June 18-19 meeting that the best thing to do would be to end the program there, rather than buy $5-billion of bonds in November. Under quantitative easing, the Fed creates money to purchases the assets, which in turns puts downward pressure on interest rates. The value of the Fed’s portfolio now exceeds $4-trillion, compared with less than $1-trillion before the financial crisis.
“Participants generally agreed that if incoming information continued to support its expectation of improvement in labour market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases in order to avoid having the small, remaining level of purchase receive undue focus among investors,” the Fed said in minutes of the June policy meeting, released Wednesday after the customary three-week delay.
The minutes confirmed the widely held view that while the U.S. economy is accelerating, it’s not accelerating fast enough to convince most Fed policy makers that stimulus no longer is necessary. Fed Chair Janet Yellen has made clear in recent months that the central bank intends to leave its benchmark lending rate pinned at zero for some time after it stops buying assets.
Equity markets rose after the minutes were released, as investors were reassured anew that the Fed isn’t close to changing tack. The minutes revealed that many on the policy committee remain wary of weakness in the labour market, household consumption and demand for houses. A particular point of concern was wages, which are growing at a less-than-vigorous annual rate of about 2 per cent.
“Whether the Fed raises interest rates earlier or later than anticipated depends on how well the economy performs in the second half of the year,” said Paul Edelstein, director of financial economists at IHS Global Insight, a research firm.
Fed officials expressed unease with investors’ apparent easiness with an economic outlook that central bankers find at least somewhat troubling. Major stock markets are trading at record levels, the bonds of recently troubled countries are surprisingly cheap, and measures of overall volatility are low. Some officials worried these factors “are an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes said.
The Fed’s decision to articulate clearly when it plans to end quantitative easing shows policy makers are sensitive to being responsible for any unnecessary surprises. The central bank’s aggressive involvement in financial markets as the result of its bond-buying strategies means that walking away may not be easy.
Fed officials used the minutes to advertise their latest thinking on an appropriate exit strategy. Most on the policy committee are agreed that the interest rate the Fed pays on excess reserves private lends stash at the central bank is the most appropriate tool manage the amount of cash in the economy.
There also appears to be agreement on an aspect of how the Fed manages its portfolio. Currently, when the assets the Fed has purchased since the crisis come due, the central bank re-invests the proceeds. The minutes said most on the policy committee think that policy should continue until after the Fed raises its benchmark rate.