The Corner

Fed Slows Quantitative Easing — A Little

The Federal Reserve announced today it will slow its money-printing/bond-buying program (“QE3”) from a rate of $85 billion a month to $75 billion — that $5 billion less of mortgage-backed securities bought per month, and $5 billion less of long-term Treasury bonds. It didn’t make clear at what point the Fed plans to further slow or end the bond-buying program (something Bernanke may do at the press conference this afternoon). Key to its decision, it said, is that economic fundamentals are actually stronger than they look, and they don’t look too bad of late, with the economy growing at 2 to 3 percent, and about 200,000 jobs being added per month. They explained:

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.

The “federal fiscal retrenchment” refers to the significant tax increases (income-tax hikes and the expiration of the payroll-tax cut) and spending cuts (sequestration) that took place at the beginning of 2013. The fact that the economy is doing pretty well despite the fact that many economists thought those measures would slow the economy, in other words, means it’s actually even better than we think, so the Fed can tighten its monetary policy slightly (the government shutdown and debt-ceiling fight also appears not to have given the economy significant jitters). As long as markets agree with the Fed, that’s one reason why they’re not freaking out about the news of “tapering” these purchases: Stocks are up on the news and interest rates haven’t shot up. Rates will rise as the taper continues, but if all goes well, that’ll be because people expect the economy to be improving, not because of the tighter policy per se. The Fed has a long way to go, but this looks like a good start.

Another reason markets are tolerating the taper is that the Fed doesn’t plan to get to an actually tight policy anytime soon: It softened its other plans for how inflation and unemployment metrics will affect the eventual end of QE3 and the date when the Fed will finally raise interest rates. The central bank is slowing its bond-buying, not stopping it, and its balance sheet will keep expanding, which should still help keep long-term interest rates down, encouraging investment, especially in housing. They aim to keep the federal funds rate at 0–0.25 percent “well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal,” and they expect that employment goal to be reached sometime late in 2015. Inflation by the Fed’s preferred metric, the personal consumption expenditures index, has been consistently below the Fed’s 2 percent target lately, ranging from just above 1 percent to just below 2.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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