Fed ends huge stimulus program

 

The Federal Reserve on Wednesday ended its massive monetary stimulus program amid faster economic growth and labor market improvements.

After six years and three rounds, the central bank will eliminate its monthly bond buying program at the end of this month, as expected, and still plans to hold interest rates near zero.

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“There has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program," the Fed's policy committee said in a statement.

“The committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability,” the statement said.

Employers have added, on average, more than 200,000 jobs a month and the jobless rate has fallen to a six-year low of 5.9 percent, edging closer to a full employment  target level.

Ending a two-day meeting, the Fed said that it still plans to keep interest rates at or near zero for a “considerable time” without any hint of when rates may rise as the economy moves toward more solid footing.

That rate has been near zero since December 2008.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said this statement puts the Fed on track to start hiking interest rates next spring. 

The forecast varies among economists with many saying that the central bank will wait until next summer to begin raising rates while others have said the hikes could start sooner. 

Fed watchers have expected in the past two months that the Fed might ditch the "considerable time" language on interest rates.

But Fed Chairwoman Janet YellenJanet Louise YellenOvernight Energy: House Dem to offer measure backing Paris climate deal | Former Federal Reserve chiefs call for carbon tax | Watchdog urges agencies to update climate guidance Former Federal Reserve chairs, economists, back carbon tax Jay Powell ignores the stock market at the economy's peril MORE continued to argue that the slow rate of inflation warranted the stance. 

On the inflation front, the Fed said prices will be held down in the near-term by lower energy prices so "the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year."

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) called the end of quantitative easing “good news.”

“In both time and money, QE has overstayed its welcome by years and by trillions,” he said in a statement.

The Fed's balance sheet has ballooned to $4.5 trillion, up from $1.5 trillion, since the bond purchases started in 2008.

Hensarling argued that loose monetary policy and six years of the monetary stimulus may have inflated the next housing bubble.

“More sustainable market-driven interest rates, an orderly unwinding of the Fed’s inflated balance sheet and a more predictable, rules-based monetary policy will help foster long term economy growth,” he said.  

Stocks markets were down slightly after the Fed announcement. 

In the six weeks since the Fed’s last statement, members acknowledged the improving labor market and said that "a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing."

In previous statements, Yellen has pointed to "significant" underutilization in the labor market such as stagnant wages, too many people working part time who want full-time work and workers getting frustrated and leaving the labor market.

Since the end of 2013, the Fed has been shrinking the size of $85 billion in monthly Treasury and mortgage bonds by $10 billion a month.

The decision was approved on a 9-1 vote with only Narayana Kocherlakota, head of the Federal Reserve Bank of Minneapolis, dissenting.

Kocherlakota, who is considered a "dove," one of the Fed's officials more concerned with unemployment, said that the Fed should have said that it will keep interest rates at or near zero until its long-term inflation outlook hits the central bank's 2 percent target rate.

He also said that the asset program should have continued at the $15 billion monthly pace.  

This post was updated at 3:25 p.m.