Federal Reserve Blog

Finance Blogs » Federal Reserve Blog » Fed decides on bond purchases

Fed decides on bond purchases

By Mark Hamrick · Bankrate.com
Wednesday, September 18, 2013
Posted: 2 pm ET

The Federal Reserve isn't yet cutting back on the multibillion-dollar bond-buying program that's supposed to hasten the economic recovery. At the same time, the central bank's monetary policy body, the Federal Open Market Committee, will keep its target for the federal funds rate near zero percent.

The Fed has been buying $85 billion in assets each month for a year. The strategy, involving $45 billion of Treasury securities and $40 billion of mortgage-backed securities, has been dubbed QE3. That is shorthand for the third round of so-called quantitative easing.

There is "growing underlying strength in the broader economy," the Fed's monetary policy statement says, even when "taking into account the extent of federal fiscal retrenchment."

"However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed's statement says. That's not the timing that a lot of Fed observers had expected; many expected the Fed to cut back on bond purchases at this meeting, because of what the central bank's chairman said four months ago.

Slower asset purchases ahead?

Speaking to Congress in May, Fed Chairman Ben Bernanke said the central bank would cut back on QE3 "in the next few meetings." After that, some members of the monetary policy committee suggested that the Fed would still act aggressively to try to boost economic growth.

These were perceived as mixed messages. Global stock markets have been volatile at times, and mortgage rates rose a full percentage point over the summer in anticipation of slower asset purchases.

The policymaking body's written statement says it plans to keep the federal funds rate near zero percent, at least as long as unemployment remains above 6.5 percent while inflation remains in check. FOMC members have said the federal funds rate will not be increased before 2015. Some types of consumer debt, such as rates for credit cards and home equity lines of credit, go up and down with the federal funds rate.


Job market less than stellar

Recent improvements in the job market have been uneven, according to economic data. While layoffs have eased, hiring has not been as strong as seen in other recoveries. The employment report for August noted that the jobless rate had slipped to 7.3 percent from 7.4 percent. But the decrease largely came about because people gave up looking for work. Employers added 169,000 jobs to payrolls -- fewer than expected. Just this week, President Barack Obama, addressing the anniversary of the financial crisis, said, "We are not where we need to be."

Bernanke exit expected in January

Bernanke's term as chairman is set to end in January. Over the weekend, former Treasury Secretary Larry Summers took his name out of the running as a possible successor, writing in a letter that the confirmation process would likely be "acrimonious." Summers had previously been seen as Obama's most likely choice as nominee, but faced opposition from Democrats.

That seems to leave Fed Vice Chair Janet Yellen as the most likely candidate to follow in Bernanke's footsteps. She is widely viewed as continuing Bernanke's consensus-driven style of Fed leadership and supportive of the effort to drive down the unemployment rate.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.