The Federal Reserve announced Wednesday that it gradually will end an experimental program of purchasing U.S. Treasury securities in an effort to lower long-term interest rates — its first step to withdraw some of the trillions of dollars it has flooded into financial markets in the last year.
The Fed’s move signals that the central bank is increasingly confident of a recovery in the U.S. economy and comes as a relief to many global investors who feared the Fed’s program could be inflationary by helping the Treasury finance the burgeoning national debt. With the debt soaring by as much as $2 trillion this year, driven by the recession and huge economic stimulus programs enacted by Congress, the Fed’s program appeared to some like the tactics used by banana republics that print money to cover government deficits.
The Fed’s stated aim of lowering interest rates on 30-year mortgages and other long-term loans never was clearly achieved, in any case, since it launched the program early this year. Long-term rates on mortgages and other loans have climbed recently since reaching record lows in January.
After a two-day meeting of its rate-setting committee, the Fed said it would keep the short-term interest rates it directly controls near zero but start to curb its efforts to influence long-term rates by gradually completing the program of $300 billion in Treasury purchases by October, at which point the program would end. But it said it would continue its program of purchasing up to $1.25 trillion in Fannie Mae and Freddie Mac mortgage securities, a program that had more success at helping to keep mortgage rates low.
Richard Yamarone, economist with Argus Research, said the Fed’s move was an acknowledgment that the economy is starting to recover gradually and no longer needs the extreme measures put in place during the winter to keep it from collapsing.
“Many of the Feds emergency initiatives were rescue measures enacted for a sinking economy. Now that the economic recession has seemingly stabilized, the Fed can afford to pull in a few of its life rafts,” he said.
Nevertheless, most economists expect the Fed to keep short-term rates extremely low for another year or more as it continues to nurse the economy back to health.
“With unemployment likely to linger at uncomfortably high levels for a sustained period of time, its a safe bet the Fed finds comfort in keeping a few life preservers in the water until the coast is clear,” Mr. Yamarone said.
Kurt Karl, chief U.S. economist at Swiss Re, said foreign investors who were worried about the Fed’s policies sparking inflation should be comforted by Thursday’s move to phase out its most controversial easing program.
“Inflation will not be a problem. The Fed knows how to exit from the quantitative easing programs - this should not be a concern, he said.
• Patrice Hill can be reached at phill@washingtontimes.com.
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