The Federal Reserve announced June 19 that it would continue its policy of quantitative easing but noted that it may ease up on its bond buying activities later this year, USA Today reported.
The Fed’s two-day policy-making meeting resulted in the agency’s decision to continue its monthly purchase of $85 billion in Treasury bonds and mortgage-backed securities in an effort to hold down long-term interest rates.
However, Fed Chairman Ben Bernanke said that if the labor market and the economy in general continued to improve, the Fed would taper off on bond purchases later this year, continue reductions into 2014 and then stop them completely by mid-year 2014. These plans would be put into action only if the unemployment rate drops to 7 percent; it now stands at 7.6 percent, USA Today reported.
The Fed anticipates a faster decline in the jobless rate, expecting it to fall to 7.2 to 7.3 percent by year’s end and to 6.5 to 6.8 by the end of 2014.
Bernanke stressed that this strategy is entirely dependent on continued economic and labor market improvements, and should either of those falter, the Fed would stop scaling back bond purchases and possibly even increase them.
The Fed has said it will keep short-term interest rates near zero at least until unemployment dropped to 6.5 percent and the inflation outlook remained below 2.5 percent. However, the first rate hike could happen as soon as 2014 rather than 2015, USA Today reported. Fourteen of the 19 Fed governors and bank presidents who participated in the policy meeting reportedly don’t expect a rate increase until 2015.
The Fed anticipates lower inflation, projecting a rate of around 1.2 to 1.3 percent this year. That’s a decrease from the regulatory agency’s March forecast of 1.5 to 1.6 percent, and it could indicate that the Fed would extend quantitative easing.
Kansas City Fed Chief Esther George warned that the Fed’s “easy money” policies could drive up inflation and lead to financial imbalances. However, several economists told USA Today that they feel federal spending cuts and tax increases would slow the economy and job growth in the coming months, preventing the Fed from reducing bond purchases this fall.
The markets have been in flux since Bernanke announced the Fed might start backing off stimulus efforts. Stocks tumbled while Treasury yields rose.