Federal Reserve officials this week indicated that they will most likely end their bond-buying program by October, provided the U.S. economy continues to improve as anticipated. While the Fed has been winding down its economic stimulus program for several months, newly released minutes from the central bankers’ June meeting mark the first time an end date has been set.
Minutes show Fed officials concerned about low market volatility
The Fed has reduced its bond-buying to $35 billion per month, which is down from its high of $85 billion per month. The bank outlined a plan to reduce its bond-buying in increments around its next three policy meetings, likely ending at its October meeting with a $15 billion reduction, depending on economic conditions.
As for short-term interest rates, which have been near zero since late 2008, Fed officials said any future increases would also depend on evolving economic conditions. The minutes also outlined new tools for implementing monetary policy, namely the ability to pay interest on excess reserves and overnight reverse repurchase agreements. As the impact of these tools becomes clearer, they will likely be used to influence the federal funds rate once the policy rate is lifted.
“Although the Fed may be signaling an October end to tapering,” said Vanguard economic analyst Ravi Tolani, “Fed officials have indicated that the fed funds rate will remain near zero for a considerable time after asset purchases end, especially if inflation remains below the 2% target. That said, the minutes indicated that should economic conditions evolve as expected, the Fed may be inclined to raise the policy rate sooner than previously expected.” Continue reading