Federal Reserve ends its multitrillion-dollar bond-buying program
| Minneapolis Star Tribune | - |
Federal
Reserve Chairwoman Janet Yellen received the support of all members of
the committee to except one: Narayana Kocherlakota.
Federal Reserve ends its multitrillion-dollar bond-buying program
- Updated: October 29, 2014 - 11:19 PM
Federal Reserve Chairwoman Janet Yellen
received the support of all members of the committee to except one:
Narayana Kocherlakota.
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Its bond-buying program of economic first aid is over. Did it do what it set out to do?
In
a series of sweeping campaigns to revive the American economy, the
Federal Reserve has spent much of the past six years purchasing
trillions of dollars of bonds. Now it is done.
The
Fed said Wednesday that the economy no longer needed quite so much
help. It is the third time since 2008 the Fed has announced such a move,
but this time officials and analysts say the decision is more likely to
stick, signaling an important milestone in the nation’s painfully slow
recovery from the Great Recession.
The
central bank still plans to keep short-term interest rates near zero
for a “considerable time,” it said in a statement after a two-day
meeting of its policymaking committee. And it said it would replace
maturing bonds to keep its holdings at about $4.5 trillion.
The
bond-buying campaign has helped to fuel one of the longest bull markets
in American history. The Standard & Poor’s 500 index has risen 131
percent since the Fed started its first round of purchases in November
2008. The campaign has also helped to suppress borrowing costs. The
yield on the benchmark 10-year Treasury has declined from 2.96 percent
to 2.32 percent over the same period, even as economic conditions have
improved.
The
impact on the rest of the economy is much harder to assess. The Fed and
its supporters say the purchases have held down the cost of mortgage
loans and corporate debt, contributing to faster job growth. Other
economists dismiss the purchases as inconsequential. And some say the
Fed has exacerbated economic inequalities by helping to lift financial
markets while the rest of the economy languishes.
The
Fed critics’ dire predictions, however, have clearly failed to
materialize. Some Fed officials and economists warned that the bond
purchases, often referred to by experts as quantitative easing, or QE,
would devalue the dollar and drive up inflation. So far the opposite has
happened.
The
U.S. economy has outperformed other developed parts of the world,
helping to strengthen the dollar, while inflation has remained so
sluggish that the greater worry is now whether prices are rising too
slowly.
Kim
Schoenholtz, an economics professor at New York University, said the
Fed’s bond purchases were particularly effective and important in
stabilizing the financial system and stimulating the broader economy in
the immediate aftermath of the financial crisis. But he said that the
impact of the purchases had diminished as conditions improved, and that
it now made sense to end the program.
“I
applaud the Fed’s willingness to be aggressive, especially early on in
the crisis, and it has made sense for the Fed to run a very
accommodative policy,” Schoenholtz said. “But we should not be surprised
that monetary policy has diminishing returns.”
Schoenholtz
added that the Fed’s quick and strong response helped to explain why
the Fed was nearer to achieving its economic objectives than the
European Central Bank or the Bank of Japan, both of which are now
battling to avoid deflation.
On
Monday, the ECB disclosed the first purchases in a planned campaign to
buy private sector assets, a kind of entry-level quantitative easing.
But the amount the central bank bought — 1.7 billion euros, or $2.16
billion, worth — was considered a drop in the bucket by analysts.
Many
House Republicans regard the bond purchases as a form of reckless
meddling, and they have passed legislation to constrain the Fed’s
flexibility during future downturns. “I’m afraid the long-term legacy of
the policy will reflect the harm it has done to our nation’s seniors,
savers, and all Americans faced with greater uncertainty and the
possibility of a QE-induced bubble,” Rep. Randy Neugebauer, R-Texas,
said Wednesday.
The
Fed started buying bonds for the first time in modern times because it
had run out of other options. Under Ben Bernanke, then the Fed’s
chairman, the central bank cut its benchmark short-term interest rate to
zero in December 2008, maxing out its primary means of influencing
economic conditions.
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