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Fed Considers Ending Stimulus Program

The Federal Reserve appears to be confident enough in the trajectory of the United States economy that it looks to be planning to stop adding to its bond holdings in October, according to the minutes of the June Federal Open Market Committee meeting.

The decision has been months in the making. Fed policymakers have tapered their government bond purchases in $10 billion increments at each Committee meeting since December, cutting them to $35 billion a month from $85 billion. At the current pace, the Fed would be buying $15 billion in Treasury bonds and mortgage-backed securities by its October meeting.

The purchases are intended to reduce borrowing costs for businesses and consumers and to encourage risk-taking by investors but have been the subject of some controversy as inflation concerns persist among some economists.

Economists at large have speculated that the Fed may reduce bond purchases by $15 billion instead of the customary $10 billion pattern that it has displayed so far.

Closing out the program would be of considerable symbolic significance to the financial markets and to the American public that the economy is now capable of standing on its own two feet and does not need the Fed’s stimulus funding to prop it up.

The symbolic reality is not lost on the Fed.

“Participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors,” the minutes said.

Even after the Fed ends the growth of its bond portfolio, it plans to maintain the size of its holdings by continuing to reinvest proceeds from matured bonds. The size of the portfolio will likely stay consistent until interest rates begin to rise.

The meeting did not give any indication of when the Fed is planning to raise interest rates but the general consensus among economists is that it will likely occur in the middle of next year.

The policy makers agreed to communicate to the public later this year about the mechanisms that the Fed will use to bring up rates, as it is feared that bringing up the benchmark interest rate may not be enough because of the amount of cash in the system.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.

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