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Economy

Fed Begins to Ease Off Stimulus Program

Federal Reserve Chairman Ben Bernanke(Chip Somodevilla)

The Federal Reserve announced Wednesday that it would begin easing off the $85 billion monthly stimulus program it launched 15 months ago, reducing its monthly asset purchases to $75 billion.

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the [Fed] decided to modestly reduce the pace of its asset purchases," said a policy statement released by Fed officials after a two-day meeting.

The bond-buying program, known as "quantitative easing," or QE3, is aimed at bringing down long-term interest rates and encouraging investment and hiring. The Fed conducted two previous iterations of quantitative easing in the wake of the financial crisis. The current round, which will be divided between $35 billion in mortgage-backed securities and $40 billion in Treasury securities, is different because it's open-ended.

 

The Fed also said Wednesday that if the economy continues to improve, it would likely reduced its bond buying in "further measured steps at future meetings," although the statement noted that such decisions are "not on a preset course." The central bank said it expected to keep its benchmark interest rate near zero, where it has been for five years, "well past" when the unemployment rate reaches 6.5 percent.

Just one-quarter of economists in a recent survey by The Wall Street Journal thought the central bank would decide the incoming data was strong enough to merit gradually stepping off the pedals of its latest stimulus program in December, although many acknowledged it was a close call. 

When the Fed began QE3 in September 2012, officials pledged to keep buying bonds until the labor market improved "substantially," so long as prices were stable. Since then, the unemployment rate--just one of the Fed's measures of the economy's health--has fallen from 7.8 percent to 7 percent. Inflation, which the central bank is also mandated to watch and influence, has been running below the Fed's long-term target of 2 percent.

In Congress, Republicans have questioned the merits of continued asset purchases. "I'm concerned about the size of the Fed's balance sheet and its impact on the economy and the unintended consequences of these accommodations," Sen. Mike Crapo, R-Idaho, said at a Senate Banking Committee hearing last month with Fed Vice Chair Janet Yellen.

The primary worries about prolonged stimulus were that it would lead to another financial bubble or runaway inflation. But others fear that if the central bank pulls back on its stimulus program too soon, the United States could face deflation or an even more stagnant labor market. Indeed, Boston Fed President Eric Rosengren, who sits on the FOMC, voted against the Wednesday decision to "taper."

Rosengren "believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate," the policy statement said.

Fed Chairman Ben Bernanke will answer questions about the decision at a press conference Wednesday afternoon, which is likely his last at the helm of the central bank. His term ends Jan. 31, and the Senate is expected to confirm Yellen, the Fed's vice chair, as his replacement this week. The Fed will hold its next policy-setting meeting in late January.

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