By now, you might have forgotten that the Federal Reserve has been undertaking a massive, unprecedented stimulus program for nearly two years. But it has! And now, the end is officially nigh. Assuming the economy continues to heal at its current pace, the central bank expects to officially end its bond-buying program, known as QE3, come October, according to the newly released minutes from its June policy meeting.
This moment has been a while in the making. The Fed began its campaign to purchase $85 billion worth of assets each month back in 2012 and promised to continue until the job market had recovered sufficiently. Why the buying spree? At the time, Ben Bernanke & co. had already lowered interest rates as far as they could through conventional means, and the economy was still stuck in a stupor. The hope was that QE3 (the QE is for quantitative easing) would lower interest rates further, “in a manner akin to removing seats from a game of musical chairs,” as the New York Times put it at the time. The Fed believed that if it took mortgage bonds and treasuries off the market by purchasing them, banks would have to put their money elsewhere, and would compete to lend to businesses at rock-bottom rates. The Fed had tried previous rounds of easing (hence the 3 in QE3), but the open-ended commitment to keep on buying until the economy was good was supposed to add a little oomph.
How well it worked will be debated for years to come. But by December, the job market had improved sufficiently for the Fed to begin winding down its purchases. And despite some hyperventilating in the market that cutting off the tap would crash stock prices, disaster has yet to strike. In fact, the market doesn’t seem to have reacted at all to today’s news (the S&P 500 is up a bit for the day), which speaks well to the Fed’s decision to slowly take its foot off the gas pedal.
This means that the most important decision now facing the Fed is when to raise interest rates from zero. The whole world will be watching.