When no lessor man that WSJ's Jon Hilsenrath struggles to find anything dovish among the rubble of the QE-ending FOMC statement, it appears the dovish observers have something to worry about...
Via WSJ's Jon Hilsenrath, [10]
The Federal Reserve on Wednesday said it would stop its long-running bond purchase program at the end of October, ending a historic experiment that has stirred intense debate about its effects in markets even though the central bank said it accomplished its main goal of reducing unemployment.
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. It 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 rivals in Japan and Europe and a hopeful sign for the world economy when growth in China appears to be flagging.
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.”
If all goes as they plan, 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 suggesting 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, only to restart the effort later 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 news 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 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 in January.
Its 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 it 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 have not come to pass. A wide range of indicators point to it. 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 twelve months before the Fed launched the new round of bond buying in September 2012, and 2.6 million in the last 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.
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 only consider restarting the program, but 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.
