Fed says goodbye to historic bond buying program: 4 key takeaways
It鈥檚 the end of an historical era for the Federal Reserve.
As widely expected, the Fed announced Wednesday the end of the third phase of its landmark quantitative easing program, halting the final $15 billion in bond purchases of a multitrillion-dollar program started in late 2008 to kick-start the economy in the wake of the 2008-09 crash. But investors found the general tone of the Fed鈥檚 statement a little more hawkish than expected. Stocks ended slightly lower Wednesday in response: The Dow fell 31 points, and the S&P 500 slid 2.75 points.聽
Besides the QE3 news, the Fed鈥檚 statement held a few closely watched changes in its position on the labor market, inflation, and its timeline for raising interest rates. Here are the highlights:
Interest rates will remain low 鈥渇or a considerable time鈥�
The phrase, among the most-watched of the last few Fed statements, remained intact, as most analysts expected. The Fed reiterated its earlier assertion that it would maintain the current near-zero federal funds rate 鈥渇or a considerable time following the end of its asset purchase program this month.鈥� It did, however, hint at speeding rate hikes along if data and聽 market conditions warranted, noting,聽鈥渋f incoming information indicates faster progress toward the Committee鈥檚 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. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.聽
Analysts predict that rates will go up sometime in the middle of next year, though the exact timing is still a question mark. 鈥淥verall, today鈥檚 statement changes do not change our view that the FOMC will be raising rates in June 2015,鈥� Barclays Research economist Dean Maki writes in an e-mailed analysis. 鈥淲e think today鈥檚 statement emphasizes that tightening will proceed based on labor market progress, and external factors are only likely to interfere with that process to the extent that they seem to be slowing the labor market.鈥�
Labor market outlook more upbeat than expected
This was perhaps the most surprising part of a mostly expected statement, as the Fed鈥檚 language on labor market conditions changed slightly to indicate a more hawkish stance. The statement cited 鈥渟olid job gains and a lower unemployment rate,鈥� and went on to say that 鈥渁 range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.鈥� The stronger language gave some analysts and investors pause, and stocks fell Wednesday afternoon in response. 鈥淚ndeed, the labor market has improved notably this year on a number of measures, particularly the pace of payroll growth, jobless claims, the pace of hiring, and the decline in the unemployment rate,鈥� IHS Global Insight economist Paul Edelstein writes in an e-mail. 鈥淵et persistently-subdued wage growth suggests that the labor market is far from overheating.鈥�
Inflation outlook holds steady
The statement acknowledged that inflation continues to run 鈥渂elow the Committee鈥檚 longer-run objective,鈥� but maintained confidence 鈥渢hat the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.鈥� Economists doubt that inflation will have less impact on the Fed鈥檚 future moves than the state of the labor market, however. 聽鈥淭he interesting situation will be if the聽Fed聽is correct about the labor market but wrong about inflation,鈥� Edelstein writes If the unemployment rate is in the low-5% range, we expect the聽Fed聽to raise interest rates even if inflation is below the 2% target, at least within limits.
Overall, a more hawkish tone
The tone shifts in the Fed鈥檚 statement led to a shift in voting for the new policy. The committee鈥檚 known hawks, Richard Fisher and Charles Plosser, voted with the majority after dissenting on several previous policies. The lone dissenter was the Fed鈥檚 most dovish member, Narayana Kocherlakota, who wanted the $15 billion a month pace in bond buying to continue.
