Federal Reserve's bond-buying program likely to run its course
Tuesday, January 4, 2011; 7:27 PM
Federal Reserve officials appear unlikely to stop their controversial strategy of buying vast sums of Treasury bonds before the program is scheduled to end in June, based on minutes of the central bank's last policy meeting, released Tuesday.
Fed officials viewed the economic outlook as slightly improved at their Dec. 14 meeting, the minutes say. But it is clear that a moderately improved economy will not be enough to lead them to reconsider their Nov. 3 decision to buy $600 billion in Treasury bonds in an attempt to pump up economic growth.
"While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program," the minutes said, "and some noted that more time was needed to accumulate information on the economy before considering any adjustment."
Moreover, some members of the Fed's policy committee "indicated that they had a fairly high threshhold" for changing the program.
Also Tuesday, new economic data offered still more confirmation that the economic growth is strengthening. In November, factory orders rose 0.7 percent, the Commerce Department said, better than expected and rebounding from a 0.7 percent October decline. The strongest momentum was in orders for nondurable goods - those expected to last less than three years - for which orders rose 1.7 percent.
The Fed's bond-purchase program, which is intended to lower long-term interest rates and drive up the value of the stock market and other investments, drew a wide range of criticism after it was unveiled. Officials in China, Germany, and some other countries accused the Fed of trying to manipulate the value of the dollar. And many congressional Republicans assailed the move as setting the stage for inflation.
But the minutes of the December meeting are a clear sign that, barring some shocking change in the performance of the economy or rise in inflation in the coming months, the entire $600 billion in bonds will be bought. However, analysts now think it is unlikely the Fed will launch a further round of bond purchases in June, given the improved economic outlook and the potential for more political blowback.
"The hurdle for ending QE2 early is high," said John Canally, an economist at LPL Financial, using shorthand for the bond-purchase program sometimes called "Quantiative Easing 2." "But the hurdle for QE3 starting in June is even higher, and today's minutes really reinforced that."
The program is intended to help the economy in large part by driving long-term interest rates down, but since its announcement, rates have instead risen. At the Dec. 14 meeting, Fed officials analyzed the range of reasons, one of them being that investors had concluded that further Treasury bond purchases by the Fed had become less likely.
They interpreted that as evidence that their program has been helpful.
"Because the backup in rates appeared to importantly reflect changes in investors' expectations about the size of Federal Reserve asset purchases, the backup was consistent with purcahses helping to keep longer-term yields lower than would otherwise be the case," the minutes said.
Fed officials were generally cautious in their outlook for the economy, seeing some improvement but growth that is still too slow. But "a few" Fed officials fear that growth could take off too rapidly, causing inflation, according to the minutes.
"Growth could pick up more rapidly than expected, particularly in light of the very accomodative stance of monetary policy currently in place," the Fed said.