Bubble about to burst: Fed announces plan to end quantitative easing by October

Bubble about to burst: Fed announces plan to end quantitative easing by October
Former Fed Chairman Ben Bernanke

Federal Reserve officials have finally specified an end date to quantitative easing, saying that they will rapidly cut off monetary injection from $35 billion a month to zero by October if all goes according to plan, the Washington Examiner reports.

Supposing that the labor market continues to exhibit the same growth it has in recent months, the Fed has acknowledged that it will begin slowing its bond purchases. The proposed rate is to eliminate $10 billion for the next two meetings, with the last $15 billion being cut at the October meeting. While the Fed will in fact stop buying bonds, it will still have approximately $4 trillion worth on its balance sheet.

This move continues a previous trend of slashing the amount of Treasury and mortgage-backed securities by $10 billion a month since December 2013.

October could see the final end to the quantitative easing initiated by former Federal Reserve Chairman Ben Bernanke in 2012, which came in response to a $600 billion stimulus program between 2010 and 2011, named QE2. The goal was to prevent financial panic and deflation from the financial crisis beginning in 2008, and since then, the Fed’s balance sheet has skyrocketed from $900 billion to $4.4 trillion.

Said Peter Boockvar, managing director at The Lindsey Group:

As the QE end is well telegraphed, today’s minutes didn’t reveal anything new on the next mystery of when the Fed raises rates, but be sure that the bond market will price that in well before any official policy action is taken.

Norbert Michel, Research Fellow in Financial Regulations at the Thomas A. Roe Institute for Economic Policy Studies for the Heritage Foundation, agreed with the plan to quickly cut off quantitative easing.

Aside from inflation risk, the Fed has long-term political risks that are heightened by having so many of these assets on its balance sheet, and these risks will go up when interest rates go up. They also can’t really make a very good case that these QE purchases have given us much economic growth.

So the safest thing to do is to end the QE purchases and announce some sort of deliberate plan for selling off these long-term securities. They don’t have to sell 100 percent of them, and they can drag it out over several years. They might suffer some ‘losses’ on these securities sales, but the danger of future inflation and political pressure outweigh the consequences of these losses.

This report, by Jonah Bennett, was cross-posted by arrangement with the Daily Caller News Foundation.

LU Staff

LU Staff

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