FOMC preview: Will officials end the six-year QE stimulus?

by 27 Oct 2014
Tomorrow the Federal Reserve will begin its two-day FOMC meeting in Washington, D.C., that is expected to put an end to its bond-buying program, but America’s weak economy may give officials pause.

The highly anticipated decision to stop quantitative easing (QE) is drawing little attention. Fed policymakers have been signaling the QE's end for months and winding down the bond-buying began late in 2012. Since December, the Fed has tapered the purchases to $15 billion from $85 billion.

The Fed’s exit from the Treasury market could have a bigger effect if the economy heats up, economist John Lonski of Moody's Investor Services told USA Today. "It will heighten anxiety about the first rate hike," pushing up yields more quickly. Mortgages rates could raise about 10 basis points, he added. The Fed owns 38% of outstanding mortgage securities versus 22% of outstanding Treasuries.

Economic researchers at Goldman Sachs said concerns over global growth should have little effect on the Fed’s decision to end QE purchases as a large number of Fed officials have guided toward an end of purchases in October. For example, Eric Rosengren, president of the Boston Fed, said in a interview with the Financial Times last week that the Fed should not let the financial market turmoil affect the agency’s pledge to end its bond-buying program.

He said recent volatility in the financial markets doesn’t bother him. What does is if the market starts to experience “long-term rates trending well below our inflation target -- that is a warning signal.”

However, worries over the economy still might give the Federal Open Market Committee (FOMC) pause. James Bullard, president of the St. Louis Fed, has suggested the Fed continue to buy bonds at a pace of $15 billion a month until December.

The Wall Street Journal predicted QE will not end this month due to America’s weak economy and recent appreciation of U.S. dollar. The news media outlet said the strengthening greenback will hurt U.S. exports, and also drag on inflation which, so far, remains below the Fed’s 2% target.

During the Sept. 16-17 meeting, the Fed voted 8-2 to keep its key short-term interest rate at a record low. Officials said that the timing of an interest rate hike will depend on how close the economy is to achieving the Fed's goals for maximum employment and inflation running at an annual rate of 2%.

The Fed also said during the meeting that when it does start to unwind its bond-buying program, it will do so “in a gradual and predictable manner,” principally by allowing purchased securities to expire at maturity. Currently, the Fed still holds about $4 trillion in securities it has purchased since 2008.
 

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