News Column

Fed leans toward cutting off easy money in October

July 9, 2014

By Paul, Davidson, @PDavidsonusat



The Federal Reserve is leaning toward ending its extraordinary economic stimulus in October, minutes of the Fed's June 17-18 meeting show.

Citing an improving labor market and economy, Fed policymakers have tapered their government bond purchases in $10 billion increments at each meeting since December, cutting them to $35 billion a month from $85 billion. At that pace, the Fed would be buying $15 billion in Treasury bonds and mortgage-backed securities by its October meeting.

Economists have debated whether the Fed would continue to trim the purchases by $10 billion at the October meeting -- leaving it buying $5 billion in bonds until the December meeting -- or cut the purchases by $15 billion to zero in October.

At last month's meeting, Fed policymakers said they regard the choice as a "technical issue with no substantive macroeconomic consequences" and no impact on when the Fed will raise its benchmark short-term interest rate. That rate is now near zero, and the first increase is expected sometime next year.

Yet, while Fed officials have clearly said the bond buying would be halted this year, closing out the program would carry symbolic significance. The purchases have held down long-term interest rates for several years, spurring purchases of homes and factory equipment. The most recent phase of the bond-buying program began in September 2012, but the Fed has bought well over $3 trillion in bonds since the 2008 financial crisis.

Fed policymakers "generally agreed" that "it would be appropriate to complete asset purchases with a $15 million reduction in order to avoid having a small remaining level of purchases receive undue focus among investors," according to the minutes.

Fed officials last month also indicated they're in no hurry to raise the central bank's benchmark short-term interest rate even though inflation has picked up recently. "Some" policymakers continued to voice concern about annual inflation that remains below the Fed's 2% target. "A couple" suggested the Fed "may need to allow the unemployment rate to move below its longer-run normal level for a time in order to keep inflation expectations anchored and return inflation to its 2% target," the minutes show.

Fed policymakers' individual forecasts from June indicate many see the first rate hike coming around mid-2015, but after a recent spate of encouraging economic news, some economists speculate it could happen in March. They have cited an unemployment rate that has fallen faster than the Fed expected, dipping to 6.1% from 6.3% last month.

The minutes, however, reflect that some Fed officials are still inclined to keep interest rates low for an extended period.

"Some others," however, expected a faster pickup in inflation," the minutes say.


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Source: USA Today


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