Quantitative Easing Will End Next Month, But the Fed Isn’t Going to Raise Rates for a While

The Federal Reserve’s Open Market Committee announced today that, as expected, the central bank will slow its program of bond purchases, known as quantitative easing, this month and plans to bring the program to an end in October. The stimulus program originally involved purchasing federal-government bonds and federally backed mortgage bonds at a rate of $85 billion a month, until the Fed felt like the labor market had sufficiently recovered to rely just on having low interest rates as a stimulative measure.

That time has finally come, but that doesn’t mean the Fed thinks the labor market is finally healed, or that its “accommodative” monetary policy is done helping out — the main interest rate the Fed controls will remain around 0 percent “for a considerable time” after quantitative easing ends next month. Investors and observers had wondered whether the Fed would reconsider the phrase “considerable time” (seriously, two very important words), since it suggests that monetary policy will stay loose for probably another year or so.

At the Fed’s last meeting, in July, when there were concerns that inflation was starting to pick up — the Fed’s measure of inflation has run consistently below its target rate, 2 percent — the bank didn’t blink, choosing to continue tapering the size of quantitative easing at the same rate, and promising that rates will stay near zero for “a considerable time.” 

The Fed’s announcement today reflects the fact that these concerns have faded somewhat: In July, the committee said “inflation has moved somewhat closer” to the Fed’s target, while now it’s back to saying inflation “has been running below” that target. In fact, it’s possible, though quite unlikely, that if inflation remains low and the labor market stays a little softer this fall than it was earlier in the year, that the Fed won’t end QE next month at its October meeting. The plan is subject to changing economic conditions, but QE probably will end next month.

Not every member of the ten-member Fed board agreed with the statement today, or the decision to keep promising loose monetary policy, though: Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser both objected, essentially saying that they think promising easy money for the (“considerable”) chosen amount of time is too risky, because they think inflation is more likely to rise than the other board members do.