Tue | Sep 18, 2018

Fed ends bond buying

Published:Thursday | October 30, 2014 | 12:00 AM
FILE - This March 14, 2014 file photo shows the Federal Reserve headquarters building in Washington. (AP Photo/J. David Ake, File)

The United States Federal Reserve plans to keep a key interest rate at a record low to support a US job market that?s improving, but still isn?t fully healthy, and help lift inflation from unusually low levels.

As expected, it?s also ending a bond-purchase programme, referred to as quantitative easing or QE, that was intended to keep long-term rates low.

The Fed on Wednesday reiterated its plan to maintain its benchmark short-term rate near zero ?for a considerable time?.

Most economists predict that the Fed won?t raise that rate before mid-2015. The Fed?s benchmark rate affects the rates on many consumer and business loans.

In a statement ending a policy meeting, the Fed suggested

that the job market, though

still not back to normal, is strengthening. The statement drops a previous reference to ?significant? in referring to an ?underutilisation? of available workers.

Instead, the Fed said that the underutilisation of labour resources is ?gradually diminishing?. The Fed also said that labour market conditions had improved further with ?solid job gains and a lower unemployment rate?.

The change indicates that the Fed believes the labour market, while not completely restored following the Great Recession, is at least in better shape. One of the Fed?s major goals is to achieve maximum employment, which it currently defines as an unemployment rate between 5.2 per cent and 5.5 per cent. The unemployment rate in September fell to 5.9 per cent.

The decision was approved with a 9-1 vote. The one dissent came from Narayana Kocherlakota, the president of the Fed?s regional bank in Minneapolis. He objected, contending that the Fed should have changed its rate hike guidance to link it to inflation expectations rising to the Fed?s two per cent target. He also argued that in light of the recent slide in the market?s expectations for future inflation, the Fed should also have continued its bond purchase programme at the current level of US$15 billion.

Kocherlakota is considered one of the Fed?s leading ?doves?, Fed officials who are more concerned about unemployment than the risk that low interest rates could trigger inflation.

At the last meeting in September two ?hawks?, Fed officials who are more concerned about inflation threats, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, had dissented.

The US economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that?s reduced the unemployment rate to a six-year low of 5.9 per cent. Still, the housing industry is struggling, and global weakness poses a potential threat to US growth.

Fed Chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern.

These include stagnant pay; many part-time workers who can?t find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.

What?s more, inflation remains so low it isn?t even reaching the Fed?s long-term target rate of two per cent. When inflation is excessively low, people sometimes delay purchases ? a trend that slows consumer spending, the economy?s main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.

Investors are expected to remain on high alert for the first hint that rates are set to move higher.

Most economists have said they think the Fed will start raising rates by mid-2015. But global economic weakness, market turmoil and falling inflation forecasts have led some to suggest that the Fed might now wait longer.

The Fed?s decision to end its third round of bond buying had been expected. It has gradually pared the purchases from US$85 billion in Treasury and mortgage bonds each month to US$15 billion. And the Fed had said it would likely end the programme after its October meeting if the economy continued to improve.

Even with the end of new purchases, the Fed?s investment holdings stand at US$4.5 trillion ? more than US$3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won?t begin selling its holdings until after it starts raising short-term rates.

Most economists have predicted that the Fed?s first rate hike won?t occur until next summer. Some foresee no increase until fall, in part because of fears that the global economy is weakening and could threaten the US economy.

The bond-buying programme the Fed is now ending was intended to lower long-term borrowing rates to encourage spending and spur economic growth. The Fed began the purchases after it had cut its main policy tool, the federal funds rate, as low as it could go. The Fed?s benchmark short-term rate has been at zero since December 2008.

Critics contend that the Fed will find it hard to sell its massive holdings without jolting financial markets.

They also worry that all the money it has pumped into the economy will eventually ignite inflation and cause dangerous bubbles in assets like stocks or housing.

? AP