The Federal Reserve on Wednesday said it would stop its
long-running bond-purchase program at the end of October, ending a historic
experiment that has stirred debate about its effects in markets even though the
central bank said the policy accomplished its main goal of reducing
unemployment.
At the same time, the Fed upgraded its assessment of the job
market’s performance while pointing to some short-term downside risks on
inflation. The central bank stuck to an assurance that short-term interest
rates will remain near zero for a “considerable time.”
Taken together, the moves mark a vote of confidence by the
Fed in the U.S. economy, which appears to have grown at a pace near 3% or more
in the third quarter. That’s a much better performance than in Japan and Europe
and a hopeful sign for the world economy as growth in China appears to be
flagging.
Pointing to “solid job gains” and a falling unemployment
rate, the Fed said a range of labor-market indicators suggest that labor-market
slack is “gradually diminishing.” In the process it struck from the statement
an earlier assessment that labor-market slack was substantial, a phrase
investors have been watching closely for signs the Fed is becoming more
confident about the economy.
If all goes as they plan, Fed officials will turn their
attention in the months ahead to discussions about when to start raising
short-term interest rates and how to signal those moves to the public before
they happen. Many expect to move on rates by the middle of 2015. Fed officials
stuck to an assurance that rates will remain near zero for a “considerable
time,” a strong suggestion that their thinking about the timing of rate
increases hasn’t changed much.
Yet plenty could go wrong and force the Fed to tear up the
plan. Twice before officials declared the Fed would stop bond-buying programs,
only to restart when growth, hiring and inflation appeared to sag.
The Fed’s rate assurance included a new qualifier: If the
job market improves more quickly than expected or inflation rises, rate hikes
could come sooner, and vice versa.
The Fed did point in its statement to new risks on the
inflation front, noting that inflation expectations had softened in Treasury
Inflation-Protected Securities markets. Officials also pointed to downward
moves in energy prices, but said they didn’t expect downward pressure on
inflation to last.
The Fed launched the latest round of bond purchases in
September 2012, when it said it would buy $40 billion a month of mortgage bonds
and keep going until it saw substantial improvement in the job market. It
expanded the purchases to $85 billion a month of Treasury bonds in December
2012 and gradually began phasing the program out this January.
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