The Federal Reserve will end its large-scale bond-buying program this month, the central bank announced Wednesday, marking the completion of a historic two-year effort to keep the U.S. from entering a double-dip recession.
In a statement issued following its two-day meeting in Washington Wednesday, the Fed’s monetary policy committee also reinforced its commitment to holding short-term interest rates near zero into next year.
The statement made note of recent “solid job gains” and attributed a recent slowdown in inflation to lower energy prices, both small changes that will signal to investors that the Fed remains upbeat about the prospects for growth amid recent stock and bond market turbulence and slowing growth overseas.
The Fed maintained its language that it will hold rates near zero for a “considerable time” after the bond purchases are phased out at the end of the month.
Fed officials also underscored the fact that their plans for eventually raising interest rates remain dependent on the economy continuing to improve. “If incoming information indicates faster progress toward the committee’s employment and inflation objectives than the committee now expects, then increases in the target range for [short-term interest rates] are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated,” the statement reads.
Bond market prices currently indicate that investors expect the first rate hike between June and September of 2015.
With its large-scale bond purchases over, Chairwoman Janet Yellen and other Fed officials will rely more on communication about the timing of the first rate increases to ease monetary conditions and support the country’s slow recovery.
Nevertheless, the central bank’s balance sheet has grown to nearly $4.5 trillion, up from roughly $2.8 trillion before the latest purchases of Treasury and mortgage-backed securities began in late 2012, and up from $900 billion before the financial crisis.
Fed officials have said the size of the Fed’s total bond holdings provides stimulus, rather than the monthly purchases.
But markets were rattled by former Chairman Ben Bernanke’s suggestion in late spring 2013 that the Fed would move to “taper” its then-$85 billion monthly purchases, with stocks falling and bond yields spiking. Some analysts, including former Fed Chairman Alan Greenspan, have expressed concern that similar movements could be in store following the Fed’s announcement Wednesday.
Stocks also fell after the end of the bond-buying programs now known as QE1 in 2010 and QE2 in 2011.
Wednesday’s monetary policy announcement had one dissent, from Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, considered one of the committee’s most “dovish” members. Kocherlakota dissented on the grounds that the Fed should have kept the quantitative easing program in place and promised low rates until inflation neared the Fed’s 2 percent target.
