Fed Ends Bond Buys, Sticks to 0% Rate for ‘Considerable Time’
By JON HILSENRATH
Updated Oct. 29, 2014 3:12 p.m. ET
CENTRAL BANK WATCH
Here is how the central banks in four major advanced economies have moved two key levers of monetary policy in recent years, and how two important economic indicators have responded.View the interactive.
Pointing to “solid job gains” and a falling unemployment rate, the Fed said a range of labor-market indicators suggest that labor-market slack is “gradually diminishing.” In the process it struck from the statement an earlier assessment that labor-market slack was substantial, a phrase investors have been watching closely for signs the Fed is becoming more confident about the economy.
“The Committee judged that there has been substantial improvement in the outlook for the labor market since the inception of its current asset purchase program,” the Fed said. “Moreover, the committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in the context of price stability.”
WSJ's Simon Constable, Emma Moody, and J.P. Morgan's Meg McClellan discuss the Fed's decision to wind down its bond-buying and when interest rates are likely to rise. Photo: Getty.
WSJ's Jon Hilsenrath and Emma Moody and Meg McClellan of J.P. Morgan discuss the Federal Reserve's rate decision, including the end of the Fed's bond-buying program. Photo: Getty.
If all goes as they plan, Fed officials will turn their attention in the months ahead to discussions about when to start raising short-term interest rates and how to signal those moves to the public before they happen. Many expect to move on rates by the middle of 2015. Fed officials stuck to an assurance that rates will remain near zero for a “considerable time,” a strong suggestion that their thinking about the timing of rate increases hasn’t changed much.
“The Committee judged that there has been substantial improvement in the outlook for the labor market since the inception of its current asset purchase program,” the Fed said. “Moreover, the committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in the context of price stability.”
WSJ's Simon Constable, Emma Moody, and J.P. Morgan's Meg McClellan discuss the Fed's decision to wind down its bond-buying and when interest rates are likely to rise. Photo: Getty.
WSJ's Jon Hilsenrath and Emma Moody and Meg McClellan of J.P. Morgan discuss the Federal Reserve's rate decision, including the end of the Fed's bond-buying program. Photo: Getty.
If all goes as they plan, Fed officials will turn their attention in the months ahead to discussions about when to start raising short-term interest rates and how to signal those moves to the public before they happen. Many expect to move on rates by the middle of 2015. Fed officials stuck to an assurance that rates will remain near zero for a “considerable time,” a strong suggestion that their thinking about the timing of rate increases hasn’t changed much.
Yet plenty could go wrong and force the Fed to tear up the plan. Twice before officials declared the Fed would stop bond-buying programs, only to restart when growth, hiring and inflation appeared to sag.
The Fed’s rate assurance included a new qualifier: If the job market improves more quickly than expected or inflation rises, rate hikes could come sooner, and vice versa.
The Fed did point in its statement to new risks on the inflation front, noting that inflation expectations had softened in Treasury Inflation-Protected Securities markets. Officials also pointed to downward moves in energy prices, but said they didn’t expect downward pressure on inflation to last.
The Fed launched the latest round of bond purchases in September 2012, when it said it would buy $40 billion a month of mortgage bonds and keep going until it saw substantial improvement in the job market. It expanded the purchases to $85 billion a month of Treasury bonds in December 2012 and gradually began phasing the program out this January.
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The bond-buying program’s legacy likely will be a subject of hot debate on Wall Street, academia and central banking for decades to come. Critics of the Fed for years have argued the strategy risked stoking inflation, devaluation of the dollar and market distortions. Officials hoped to suppress interest rates and push investors into risky assets, and in turn spur borrowing, spending, investment, growth and hiring.
The worst fears about bond buying—or “quantitative easing,” as it is often described—clearly haven’t come to pass. For instance, inflation, as measured by the Commerce Department’s personal-consumption expenditure price index, has been unchanged at 1.5% since September 2012. Meantime, the dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies.
Yet demonstrations of its benefits are elusive. Though the jobless rate has declined from 8.1% before the latest program was launched to 5.9% in September, this is in part due to people leaving the work force and the ranks of those counted as unemployed. Job growth was 2.2 million in the 12 months before the Fed launched the new round of bond buying in September 2012, and 2.6 million in the past 12 months, but it is hard to prove the faster growth comes from the Fed’s efforts and not other factors.
The Fed said it would continue for now its practice of using proceeds from maturing securities to buy other securities in order to keep its portfolio at the same overall size, which now exceeds $4 trillion.
St. Louis Fed President James Bullard said before the meeting the Fed should consider continuing the program because inflation expectations had fallen of late. But several other Fed officials have suggested in recent weeks they would consider restarting the program only if the economy seriously falters.
Minneapolis Fed President Narayana Kocherlakota dissented. He wanted the Fed to continue bond purchases and to pledge to keep rates low more assertively.
The worst fears about bond buying—or “quantitative easing,” as it is often described—clearly haven’t come to pass. For instance, inflation, as measured by the Commerce Department’s personal-consumption expenditure price index, has been unchanged at 1.5% since September 2012. Meantime, the dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies.
Yet demonstrations of its benefits are elusive. Though the jobless rate has declined from 8.1% before the latest program was launched to 5.9% in September, this is in part due to people leaving the work force and the ranks of those counted as unemployed. Job growth was 2.2 million in the 12 months before the Fed launched the new round of bond buying in September 2012, and 2.6 million in the past 12 months, but it is hard to prove the faster growth comes from the Fed’s efforts and not other factors.
The Fed said it would continue for now its practice of using proceeds from maturing securities to buy other securities in order to keep its portfolio at the same overall size, which now exceeds $4 trillion.
St. Louis Fed President James Bullard said before the meeting the Fed should consider continuing the program because inflation expectations had fallen of late. But several other Fed officials have suggested in recent weeks they would consider restarting the program only if the economy seriously falters.
Minneapolis Fed President Narayana Kocherlakota dissented. He wanted the Fed to continue bond purchases and to pledge to keep rates low more assertively.
Central Bank Upgrades Assessment of Job Market, but Sees Downside Risk on Inflation
By Jon HilsenrathFed Ends Bond Buys, Sticks to 0% Rate for ‘Considerable Time’
At the same time, the Fed upgraded its assessment of the job market’s performance while pointing to some short-term downside risks on inflation.
The central bank stuck to an assurance that short-term interest rates will remain near zero for a “considerable time.”
Taken together, the moves mark a vote of confidence by the Fed in the U.S. economy, which appears to have grown at a pace near 3% or more in the third quarter. That’s a much better performance than in Japan and Europe and a hopeful sign for the world economy as growth in China appears to be flagging.