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QE’s time could be limited, but no end in sight to cheap money

Federal Reserve Board Chairman Ben Bernanke appears before a Senate Banking, Housing and Urban Affairs Committee in Washington February 26, 2013.

JASON REED/REUTERS

It's time to end the "QE-to-infinity" jokes.

The Federal Reserve sees an end to quantitative easing, the bond-buying strategy known as QE. If all goes well, the majority of the Fed's policy committee are ready to end the program by the end of the year.

"A few members felt that that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year," the minutes of the Federal Open Market Committee's March meeting said.

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"Several others thought that if the outlook for labour market strength that if the outlook for labour conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and stop them by year-end," according to the minutes released Wednesday.

Now, if all doesn't go well, all bets are off.

The Fed has been crystal clear in saying QE will remain in place until it sees a substantial improvement in the outlook for the labour market. Fed officials met before the Labor Department reported Friday that non-farm payrolls expanded by only 88,000 in March, a reading that caused a wave of disappointment on Wall Street as it was well below expectations.

But we don't know if it was below the Fed's expectations.

To be sure, Fed Chairman Ben Bernanke and the rest of the policy committee surely were disappointed by the result. At the same time, the Fed seems ready for a certain amount of disappointment. Last month, policy makers dropped their 2013 growth outlook to range of 2.3 per cent to 2.8 per cent from 2.3 per cent to 3 per cent in December.

That's why it would be a mistake to dismiss the minutes as old news.

The glumness that followed last week's jobless numbers seemed to forget that the U.S. labour market dips every so often, even in good times. That will make the next hiring report especially crucial. Another weak reading would suggest that the economy did in fact lose momentum ahead of the second quarter, which would argue for keeping the monetary throttle open.

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But if the jobs numbers bounce back to where they were when the Fed's leaders gathered in March – a pace in excess of 200,000 a month – then financial markets surely will begin preparing for the end of QE.

The minutes suggest officials will at first taper their purchases before ending the program outright.

That prospect will trouble those who think the Fed should proceed at full speed until every American who lost his or her job in the recession has a new one.

But it's important to remember that even if QE ended tomorrow, U.S. monetary policy still would be plenty loose. The benchmark lending rate is at zero and the Fed has no intention of even thinking about raising it until the unemployment rate approaches 6.5 per cent.

The jobless rate currently is 7.6 per cent and few think that figure will get much lower before the end of the year. QE's time could be limited, but there's no end to cheap money on the horizon

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