The Federal Open Market Committee (FOMC) of the Board of Governors of the Federal Reserve System announced today that its asset purchase program, known as QE3 (quantitative easing), will end this month, citing sufficient economic growth.
Following months of speculation of the end of the program, Fed made the announcement in today's FOMC statement, following the FOMC's seventh of eight meetings this year. Unlike the Fed's first two QE programs, which were launched in 2008 and 2010, QE3 allowed for the unlimited purchase of mortgage-backed securities; the Fed planned to continue the stimulus program until the economy was deemed healthy enough.
The Fed suggested in today's FOMC statement that U.S. economic activity is expanding at a "moderate pace" since the Committee's last meeting on September 17.
The Committee cited several factors in its assessment of the state of the economy. Since the start of September, the nation has experienced solid job gains and posted the lowest unemployment rate in six years, and labor market indicators show a gradual diminishing in the underutilization of labor resources. The housing sector has been slow to recover from the crisis of 2008, but household spending rose moderately and business fixed investment is advancing.
With the substantial improvement in the outlook for the labor market, as judged by the Committee, since the inception of the QE3 asset purchase program two years ago and the broader economy's underlying strength to support ongoing progress toward maximum employment in a price stability context, the Committee decided to conclude the QE3 program this month.
"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction," the Committee's statement said. "This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
In order to support continued progress toward maximum employment and price stability, the Committee decided in today's meeting that the current zero to one-fourth percent target range for the federal funds rate is still appropriate. The Committee will assess both realized and expected progress toward the objectives of maximum employment and 2 percent inflation in order to determine how long to maintain the current target range for the federal funds rate.
The Committee said it will use a wide range of information to determine how long the current target range will be appropriate, including labor market conditions, inflation pressures and expectations, and financial development readings. The current target range could be in place for a while, the Committee said.
"The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the zero to one-fourth percent target range for the federal funds rate for a considerable time following the end of its asset purchase program (QE3) this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored," the Committee's statement said.
Increases in the target range for the federal funds rate could come more quickly if the Committee's employment and inflation objectives are met sooner than expected, the Committee said. If information indicates that the Committee's employment and inflation objectives are taking longer than anticipated to be met, then an increase in the federal funds rate target range could come much later than expected.
The Committee's next meeting is scheduled for December 16-17.