The Fed’s purchases of long-term bonds, known as quantitative easing, are widely expected to end in the fourth quarter of this year. The steady phase-out has become so routine and predictable that QE has virtually vanished from the conversation on Wall Street and among Fed watchers.
That’s a remarkable feat considering the program clocks in at more than $1 trillion -- and counting -- and is arguably the most unconventional of the many unorthodox policies the central bank pursued in the wake of the financial crisis. Investors have been more worried about rising tension in Ukraine than what was once called the Taper Tantrum. The major U.S. indexes fell last week, while the yield on the 10-year Treasury was also down ahead of the Fed’s meeting.
This is exactly the type of nonresponse for which the Fed has been aiming since it began hinting in spring 2013 that the days of QE were numbered. At first, the mere suggestion that the Fed would start scaling back was enough to ignite a selloff in the markets. The backlash was so strong that interest rates spiked -- offsetting the $85 billion a month the central bank continued to pour into the recovery in hopes of keeping long-term rates low.
Once the Fed began the phase out, it opted to cut its bond purchases at a snail’s pace of $10 billion a month. The small reductions provide investors plenty of time to adjust to the new world order but significant enough to ensure the program will end this year.
Does QE still matter? Some economists have argued all along that even though this round of Fed bond purchases is twice as large as the previous ones, it has been the least effective. Others argue that once the program’s end date became clear, investors were able to calculate the total size of the program, pulling forward any residual impact. Mortgage rates are actually slightly lower than they were when the phase-out was announced.
Fed officials have tried to preserve some wiggle room by arguing that the wind down is not on autopilot. If the economy stops growing or the recovery suddenly takes off, they can slow down or speed up the program as needed. And while that is true, the central bank should be glad investors have turned their attention elsewhere and just let this plane land itself.