Federal Reserve policymakers have prepared a strategy to wrap up the $85 billion asset purchasing program, reports Jon Hilsnerath of the Wall Street Journal. The Fed officials plan to wind down the amount of bond purchasing in a careful and step-by-step manner depending on the job market and inflation. However, officials haven’t yet decided the timing to start the winding down process.
How and when the central bank will end quantitative easing is of great interest in the financial markets. Markets fear that it may not be a steady path, based on their past experience. After Jon Hilsnerath published the report on Friday, futures went down, stocks took an unexpected nosedive and Treasury prices collapsed.
The Markets May Overreact
Fearing that markets may overreact, officials plan to clarify their strategy first. Bonds and stock markets have been soaring since the Fed announced it would ramp up its bond-purchasing program in September 2012. Abruptly ending the program could send shockwaves across the markets. Learning from their past experience, many officials said that they have seen the effects of ending other similar programs too soon, so they wouldn’t repeat the mistake.
After its policy meeting earlier this month, the Federal Reserve said in a statement that it may boost or reduce the pace of bond-purchasing based on the economic outlook. The hint about boosting the asset purchase program seemed like an acknowledgement that more aid was required. Inflation in April was below the fed’s 2 percent objective and employment data was weak. However, many policymakers believe that economic recovery is on the right track, and there is no need to worry about inflation slowdown.
Timing of First Step Yet To Be Decided
Philadelphia Fed Chief Charles Plosser said that the central bank could reduce the size of the asset purchase program, and maintain it at that level to assess the effects, or they may also take several steps if that seemed right. If data shows that the economy can weather federal spending cuts and tax increases, many officials say the Fed may take its first step this summer. But the central bank may wait longer if the economy disappoints.
Quantitative easing has increased the Fed’s security holdings from $2.58 trillion to $3.04 trillion since September 2012. The unemployment rate has declined from 8.1 percent to 7.5 percent since August last year. The central bank has policy meetings June, July and September. The Wall Street Journal expects Ben Bernanke to unveil his action plans during one of those meetings.