After six years, the Federal Reserve announced the final drawdown of its bonding-buying program known as quantitative easing, or QE, at the end of its two-day policy meeting Wednesday.
Since the fall of 2008, the central bank has been buying mortgage-backed securities and Treasury bonds — almost $4.5 trillion in total by now — in several iterations of quantitative easing (QE1, QE2 and QE3) to lower interest rates and stimulate the economy.
Wednesday’s final drawdown of these purchases was widely expected. Since January of this year, the Fed has gradually been reducing, or tapering, by $10 billion a month the assets it purchases. The Fed will reduce these purchases by a final $15 billion at the end of this month.
The Fed attributes its decision to “a substantial improvement in the labor market” since it first undertook these purchases in the immediate aftermath of the financial crisis. Wednesday’s release cites job gains and lower unemployment. The economy added 248,000 jobs last month and the unemployment rate dropped to 5.9 percent, its lowest since the summer of 2008.
Also expected in Wednesday’s announcement was the Fed’s decision to keep short-term interest rates near zero “for a considerable time.” Even after beginning tapering, the Fed has been publicly projecting that interest rates would need to remain low after the end of quantitative easing.
Some economists have pushed for raising rates sooner rather than later out of fear of rising inflation. Besides supporting maximum or “full” employment, maintaining price stability is the Fed’s parallel responsibility. (Nashville money manager Jon Shayne — actually, his musical alter ego Merle Hazard — bemoans the impossibility of this “Dual Mandate” on Making Sen$e Wednesday.)
Inflation has been running well below the Fed’s 2 percent target. The Fed notes that lower energy prices will keep inflation lower in the near-term, but that “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” A consensus of 39 money managers and economists now expects a rate hike in July 2015, according to a CNBC survey.
Stocks dropped on Wall Street after the Fed’s announcement Wednesday at 2 p.m. EDT, but losses were nothing like the panic markets experienced in the summer of 2013 when the Fed first hinted they’d be tapering.