Saying that labor market conditions have improved, unemployment is down, household spending is up and that inflation has held below 2%, the Federal Reserve has decided to complete the wind-down of its quantitative easing bond-buying program designed to prop up the U.S. economy.
As of September, the Fed was adding to its holdings of agency mortgage-backed securities (MBS) at a pace of $5 billion per month and to its holdings of longer-term Treasury securities at a pace of $10 billion per month, but as of this week, it will no longer be purchasing those assets.
Now, the Federal Open Market Committee will focus on its existing policy of ‘reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities … and of rolling over maturing Treasury securities at auction.’ This, in turn, ‘should help maintain accommodative financial conditions,’ committee members said in a statement.
Meanwhile, everyone in the mortgage industry is holding their breath to see if and when the Fed will move to raise short-term interest rates. Federal Reserve Chairman Janet Yellen has pledged that the Fed will keep interest rates low for a ‘considerable time’ after the bond-buying program ends.
‘The committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the zero to 0.25 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the committee's 2% longer-run goal and provided that longer-term inflation expectations remain well anchored,’ committee members said in the release.
In determining whether to raise short-term rates, the Fed will consider a range of factors, including labor market conditions, inflation and other financial developments.
‘However, 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 the federal funds rate are likely to occur sooner than currently anticipated,’ the committee members warned. ‘Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.’
The only committee member to vote against the conclusion of the bond-buying program was Minneapolis Fed President Narayana Kocherlakota, who said that with low inflation expectations, the Fed should commit to keeping rates low "at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset-purchase program at its current level."
In total, the Fed's asset-purchase program, which started in November 2008, has added $4 trillion to its balance sheet. The latest round, announced in September 2012, with monthly purchases of $85 billion in Treasuries and MBS, added $1.66 trillion alone. The Fed started the wind-down in January 2014, cutting its purchases by $10 billion per meeting.