Fed taper continues, on pace to end in October
07/30/2014 12:47 PM
07/31/2014 4:44 AM
Citing the improving economy and a firming jobs markets, the Federal Reserve announced Wednesday it was again trimming its monthly purchases of government and mortgage bonds by another $10 billion and is on pace to end the program this year.
With the announcement, the rate-setting Federal Open Market Committee will now purchase $25 billion a month in bonds to stimulate the economy and is expected to further ratchet down purchases with the expectation of ending the controversial program late this year.
“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” the Fed said in a statement, noting that it was again tapering back a program designed to spark lower long-term rates and juice the stock market.
The Fed’s has a dual mission to both keep inflation to around 2 percent and promote full employment. Its bond buying has been controversial because some critics fear it is akin to printing money and will spark a rise in wages and prices across the economy. The Fed slightly changed language in its Wednesday statement to reflect that inflation had ticked up closer to its longer-term target.
Supporters of the bond buying note that despite strong hiring over the past half year, an inordinate number of Americans have dropped out of the labor force or taken early retirement. Fed Chair Janet Yellen and colleagues gave a nod to the latter argument that strong hiring aside, there’s plenty of room to grow stronger before a tighter labor market gives employees the power to demand higher wages and push up inflation.
The committee statement said “a range of labor market indicators suggests that there remains significant underutilization of labor resources.”
The Fed is expected to end its bond buying in October. Not clear yet, however, is whether it will continue to reinvest earnings from the bonds it holds or start moving them off of the Fed’s books.
Some investment analysts worry that the bond buying has distorted how stocks and bonds would otherwise be priced. They fear a sharp correction, something that former Fed Chairman Alan Greenspan hinted at in an interview with Bloomberg Television on Wednesday.
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