Quantitative easing is effectively over.
To be sure, Yellen made the perfunctory statement that the phaseout is not on a preset course. But there seems to be almost nothing that can derail its journey. The economy shrank during the first quarter, and the housing market is back in the doldrums, but the reductions keep coming. On the flip side, inflation is picking up, and the economy has regained all the jobs lost during the recession, but the Fed is in no hurry to move faster. Official Fed policy may state otherwise, but QE is on autopilot back to the hanger.
The bond buying was never meant to last forever -- and possibly never meant to even last this long. It was always supposed to be a shot in the arm, a monetary defibrillator, designed to jumpstart a flagging recovery. But this is the third round of stimulus the Fed has injected since 2008. And Yellen seemed to signal Wednesday that it will be the last.
There's always the chance that something could go so terribly wrong -- or wonderfully right -- that the Fed is forced to overhaul its strategy overnight. But it's much more likely that if the recovery has another curveball in store, the central bank will respond with by changing the path of interest rates rather than altering the course on bond purchases. Here’s how Yellen described the central bank's approach Wednesday.
There is uncertainty about monetary policy. The appropriate path of policy, the timing and pace of interest rate increases ought to -- and I believe will -- respond to unfolding economic developments. If those were to prove faster than the committee expects, it would be logical to expect a more rapid increase in the Fed funds rate. But the opposite also holds true. If we don't see the improvement that's projected in the baseline outlook, that the opposite would be true and the pace of the timing and pace of interest rate increases would be later and more gradual.
There is still plenty about Fed policy to obsess over, such as when it will stop reinvesting in bond purchases that keep the balance sheet from shrinking or what Rorschach image can be found within the dot plots of interest rate forecasts. But now we should scratch QE off the list -- and hopefully retire its initials.