The US Federal Reserve is likely to make a final push into the post-crisis era this week with a decision to finally wind up its six-year-old economic stimulus operations.
A few worrisome clouds over the global economy might be expected to give Fed Chair Janet Yellen’s Federal Open Market Committee (FOMC) pause when they meet tomorrow and on Wednesday.
However, after repeatedly signaling the end this month of the bond-buying program known as quantitative easing (QE), the Fed is unlikely to change course, analysts said.
The Fed is currently adding US$15 billion in cheap funds to the economy per month under QE, down from US$85 billion in December last year.
The chance that the FOMC might hold off remains.
Last week James Bullard, head of the Fed’s St Louis branch and a former FOMC member, said QE should continue until the data is clearer.
US inflation expectations are dropping, Bullard said.
“That is something that a central bank cannot abide ... we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December,” he said.
However, analysts said that the Fed does not act on one or two months’ data, but looks at the trend, which has been steady if modest improvement in the US economy.
More important, they said, is what the FOMC says about the next phase of policy: the initial increase in the benchmark Fed funds interest rate, which has been held at zero since the end of 2008.
Right now that is not expected until the middle of next year.
However, any change in FOMC guidance language could give a start to rate-sensitive markets.
For the Fed, the move signals the beginning of policy “normalization” after six years of a crisis stance.
Since 2008, the Fed has pumped into the economy about US$3.5 trillion of easy money through QE operations, buying Treasury and mortgage securities to push down long-term interest rates to encourage investment and spending.
That was achieved, but with limited impact in part because while the Fed injected cash into the system, the government has slashed spending for the past three years.
One clear result though has been to reinflate the value of stocks, property and other assets that collapsed during the crisis.
Now US stocks have soared to record levels, sparking recent calls for caution, including from the IMF, that QE operations have overheated markets.
Yet, at the same time, the IMF and others have warned the Fed to be careful gearing down for the turbulence that could come with rising interest rates around the world.
“We expect the committee will stick to its guns and shut the controversial program down after Wednesday’s FOMC meeting,” FTN Financial’s Chris Low said.
The end of QE technically would not amount to tightening.
The Fed said it does not plan to sell off the assets, and for those maturing it would roll them over in the near term.
Yellen said it could “take to the end of the decade” for the Fed to get rid of assets it bought under QE.
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