Fed flags end

The US Federal Reserve plans to stop adding to its bond holdings in October, a sign of its confidence that the economy is gaining strength even as the central bank gradually withdraws its support.
Nanjing Night Net

The decision, described in an account of the Fed’s most recent policymaking meeting in June, signals the end of one of the central bank’s most aggressive efforts to stimulate the US economy. The Janet Yellen-chaired Fed, which started reducing its monthly purchases in January, said it planned to add a final $US100 billion to its holdings of Treasuries and mortgage-backed securities over the next four months, for a total of $US1.5 trillion.

But the account underscored that many Fed officials remained guarded in their optimism about the economy. It also suggested they had not yet decided when to take an even more important step in their retreat: raising short-term interest rates for the first time since December 2008.

Uncertainty over US interest rates helped drive the Australian dollar back above US94¢ after it was sold off heavily last week on comments by Australia’s Reserve Bank that the currency was overvalued. The Australian dollar has remained elevated for much of this year, as historically low interest rates and Australia’s triple-A credit rating have supported riskier currencies.

US investors generally expect the Fed to start raising interest rates next summer. It said the decision to end bond purchases in October, rather than continuing purchases at a nominal level until the end of the year, should not be interpreted as evidence that rate increases were likely to begin sooner.

”Most participants viewed this as a technical issue with no substantive macro-economic consequences and no consequences for the eventual decision about the timing of the first increase in the federal funds rate,” the minutes said, referring to the benchmark interest rate the Fed uses to influence borrowing costs for consumers and businesses.

Federal Reserve officials disagree about the pace of retreat in large part because they disagree about how much more monetary policy can accomplish. Five years past the end of what is known as the Great Recession, the share of adults with jobs has barely recovered, inflation remains below the level the Fed regards as healthy and economic output remains weak.

But since last year they have been in firm agreement that the time has come to stop buying bonds.

The purchases are intended to reduce borrowing costs for businesses and consumers and to encourage risk-taking by investors.

But the impact of the Fed’s asset purchases remains highly contentious. Officials and academics disagree about how much, if at all, the purchases have reduced the cost of mortgages and other kinds of consumer and business loans. They also disagree about the consequences.

New York Times

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