News Column

Federal Reserve Keeps Bond Buying Program in Place

September 18, 2013

Mark Davis, The Kansas City Star

federal reserve
Federal Reserve building (file photo)

Sept. 18--The Federal Reserve will not begin to cutback its $85 billion-a-month bond buying program aimed at helping the economic recovery, policymakers said Wednesday.

Markets quickly reacted, having expected the central bank to start tapering the pace of its bond purchases. Stocks, whose prices have benefited from the Fed action, jumped immediately. Bond prices also rose quickly, which reduces the level of interest rates.

A statement from the Fed cited "the extent of the federal fiscal retrenchment" and "the tightening of financial conditions observed in recent months" for holding off on any change in its policy.

Policymakers "decided to await more evidence that progress (in the economy and job market) will be sustained before adjusting the pace of its purchases," the Fed's statement said.

For the sixth time this year, the Fed's decision drew a dissenting vote from Esther George, president of the Federal Reserve Bank of Kansas City. She dissented over concerns the Fed's actions may increase the risks of future economic and financial imbalances.

George, who had voted against every Fed policy statement this year, had said in a Sept. 6 speech that "it is time" for the Fed to start cutting back. She had prescribed cutting back to buying about $70 billion of bonds a month with the aim of ending the purchases by mid-2014.

The Fed began a year ago to buy $85 billion U.S. Treasury bonds and securities backed by home mortgages each month in an effort to lower long-term interest rates. Lower interest rates are aimed at making it easier to borrow and buy big-ticket items such as houses and cars. It also is aimed at supporting prices of stocks.

Talk that it might cutback on those bond purchases led to a 1 percentage point jump in home mortgage rates though they remain near historically low levels.

Others have said a decision to cutback on the bond buying program would be a mistake.

Prior to the Fed's announcement, economist Steven Ricchiuto at Mizuho Securities, had said a cutback in the Fed's purchases would be a mistake. But he acknowledged that financial markets expected such a move.

"The makers of monetary policy have backed themselves into a corner and have little choice but to taper even though they are hard pressed to show that the economy has delivered the broad based improvement in the labor market that they established as a prerequisite for tightening," Ricchiuto said.

The Fed also holds down short-term interest rates through its near-zero target for the federal funds rate that banks charge each other on overnight loans of banking reserves. Fed promises to keep that benchmark rate near zero until unemployment declines to 6.5 percent also has helped to keep long term rates low.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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(c)2013 The Kansas City Star (Kansas City, Mo.)

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