The Federal Reserve is set to end its economic stimulus program in October, bringing to an end the controversial five-year-old scheme even as officials said there were signs that the US economy was still in trouble.
Officials have been winding down their monthly purchases of Treasury bonds and mortgage-backed securities since January, but had not set an end date for the scheme, known as quantitative easing (QE).
"If the economy progresses about as the [Fed] expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting," the Fed said in minutes released Wednesday from its June policy meeting.
Launched in 2009 in the heat of the financial crisis, QE and its successors are the largest financial aid scheme in history. In three rounds, the Fed has bought about $4tn of Treasury bonds and mortgage-backed assets. It held about $750bn of those assets before the recession bit.
Wrapping up the latest, and last, round of economic stimulus, known as QE3, the Fed is now buying $35bn per month in assets, down from a peak of $85bn. It plans to reduce the purchases in increments at its next three policy meetings, ending it in October.
Controversial from the outset, QE was designed to keep long-term interest rates down and encourage investors to back stocks or corporate debt in order to stimulate the economy. Stock markets have hit record highs under QE yet the unemployment rate remains high and there are continuing signs of weakness in the wider economy.
Senator Rand Paul, a long-time critic of QE and a potential Republican presidential candidate, has worried that the US’s economic recovery is “illusory”.
Last year, Andrew Huszar, a senior fellow at Rutgers business school and a former manager of the Fed’s mortgage-backed security purchase programme, called for an end to QE in an article for the Wall Street Journal. He said it had helped Wall Street far more than Main Street. Critics in Congress and elsewhere have also worried that QE will create another financial bubble or excessive inflation.
Fed chair Janet Yellen has long made clear, like her predecessor, Ben Bernanke, that she intends to wind down the program as and when the economy is strong enough to go it alone. An unusually harsh winter knocked the recovery off course, but there have since been signs, including strong job growth, that the effects of the bitter cold have dissipated.
In the minutes, Fed officials pointed out that “both long- and short-term unemployment and measures that include marginally attached workers had declined".
"Most participants projected the improvement in labor market conditions to continue, with the unemployment rate moving down gradually over the medium term," the minutes concluded.
However, the minutes show some Fed officials are worried about risks in the financial markets, and whether “recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions."
US stock markets largely shrugged off the end of a program that some argue has driven stock prices to unsustainable highs. Gus Faucher, senior economist at PNC Financial Services Group, said investors were looking to the future. “There’s not a whole lot in the minutes that is surprising. Expectations for the short term are in line. It looks like the first quarter slowdown was a one-off and the second will be much stronger.”
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