The end of US Federal Reserve asset purchases this week marks the climax of an unprecedented monetary campaign, but there is no room for a triumphant declaration of victory.
Barring a big shock, the US central bank will taper its last $15bn-a-month of asset purchases to zero, completing the third round of quantitative easing it began in September 2012.
With no press conference on Wednesday, however, the Fed’s only communication will be its statement – where the changes are likely to be modest. It will be a quiet end to a history-making programme of asset purchases, one that has helped put the US economy back on track, and added trillions to the Fed’s balance sheet.
The Fed is set to halt asset purchases – a policy aimed at driving down longer-term interest rates – despite recent market volatility and fears about global growth. The original goal of QE3 was a substantial improvement in the outlook for the labour market. It can declare that mission accomplished.
When QE3 began more than two years ago, with the Fed buying assets at a pace of $85bn a month, the unemployment rate stood at 8.1 per cent. It is now down to 5.9 per cent. The last jobs report was sturdy, showing 248,000 new positions, and gave little reason to doubt the labour market’s progress.
Without such a reason, Fed officials are reluctant to confuse the motivation for QE3 by following St Louis Fed president James Bullard’s suggestion, and extending purchases until their December meeting. If a new QE programme ever becomes necessary it will need a new motivation and a new explanation.
“If it looked like inflation was trending in the wrong direction, and that was going to persist, then we’d have to rethink what the appropriate monetary policy would be,” said Eric Rosengren of the Boston Fed in a recent interview with the Financial Times. He indicated QE should end as scheduled.
“But at that point we’d want to indicate that the reason we were making the change was not because we hadn’t seen substantial improvement in labour markets, but because we’d become concerned that inflation was trending down when we wanted it to trend up.”
The other issue for the rate-setting Federal Open Market Committee is how to handle its pledge of low rates “for a considerable time after the asset purchase programme ends”. That language, which needs to be changed when QE3 comes to its completion, has been a source of growing discontent among Fed officials who think it too inflexible.
The Fed has already done a lot to weaken “considerable time”. Stanley Fischer, Fed vice-chair, diluted the phrase to near irrelevance earlier this month by defining it as anything from two months to a year.
Recent market turmoil has also damped Fed enthusiasm for complicated manoeuvres on guidance. Mr Rosengren said guidance changes are affected by the state of markets. Charles Evans of the Chicago Fed has said his preference is to make “strictly necessary wording changes” to account for the end of QE3.
The simplest option is just to delete the asset purchase reference; in that case, there is no fixed starting point for the “considerable time”. A slightly more hawkish alternative is to make clear that the “considerable time” begins in October, and the clock is ticking.
Meanwhile, a host of options are floating around the Fed system for more lasting changes in language, even if they do not get used just yet.
One idea, for example, is “considerable time” eventually changing into “some time”. But that is anathema to officials who think such language gives a false sense of commitment and precision.
Most attention continues to focus on a form of words that would link both the timing and speed of interest rate rises to the pace of progress on reaching full employment and 2 per cent inflation. The existing FOMC statement already flags up most of the factors the Fed is watching. It might not need large modifications.
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