No End to Fed Stimulus in Sight

The Federal Reserve's Open Market Committee may have some dissenters, but it's keeping QE3 going for now.

Federal Reserve Board Chairman Ben Bernanke testifies before the House Financial Services Committee, Nov. 18, 2008.
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Don't listen to any of the naysayers: the Fed is keeping its foot on the gas.

At the conclusion of its January meeting, the Federal Reserve's Open Market Committee indicated Wednesday that little had changed in its policy. It will continue to purchase $85 billion in treasuries and mortgage-backed securities per month, in what is widely known as "QE3," its third round of quantitative easing. It also maintained its language surrounding interest rates, saying that it expects to keep the federal funds rate near zero at least as long as the jobless rate is above 6.5 percent and inflation is no higher than 2.5 percent. Of the 12 voting members, only one, Kansas City Fed President Esther George, voted against the committee's action, voicing concerns about continued accommodation and long-term inflation.

The unchanged Fed policy is not unexpected, but Fed-watchers have been wondering lately how long the central bank's stimulus policies will go on. The minutes from the central bank's December meeting indicated that several members would like to wind down asset purchases at or even before the end of 2013. The bond market jumped on those comments, helping to send yields on 10-year treasuries upward, to around 2 percent.

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Still, there doesn't yet appear to be any sort of end date on the open-ended QE3 program.

"The market seems to have read a lot into the last set of Fed minutes and was maybe hoping or expecting to see something different here, and what we saw [in today's statement] is more of the same," says Kathy Jones, vice president and fixed income strategist at the Schwab Center for Financial Research.

Congress' deal to avoid the fiscal cliff also helped to push bond yields up, says Greg McBride, senior financial analyst at The Fed may want to continue its purchases to keep those rates down, he says, and they also have future potential economic problems to consider.

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"I just don't subscribe to this theory that the Fed is entertaining thoughts of cutting back or stopping the stimulus any time soon," says McBride. "I think they've got plenty of reasons for cover. There are going to be bumps in the road this year economically."

Those bumps include stagnating household incomes and companies struggling to boost their revenues, he says, but they also include the actions of the lawmakers across town. The likelihood of spending cuts later this year, whether via sequestration cuts or a congressional deal to avoid those cuts, could contribute to an economic slowdown, giving the Fed further impetus to continue expanding its balance sheet.

The government reported Wednesday in its advance estimate of fourth-quarter 2012 GDP growth that a decline in defense spending helped to push economic output into negative territory. If output did shrink in the fourth quarter, it will be for the first time since 2009.

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The true test of what this month's meeting meant may come when the January minutes are released. Though the minutes do not reveal which committee member voices which opinion, it does indicate whether "a few" or "several" members approve or disapprove of a policy. If the January minutes were to indicate that "many" members want an end to QE3, says John Canally, vice president and economist at LPL Financial, that could be a sign that more members than the usual inflation hawks are pushing towards that outcome.

While hawkish Fed presidents and committee members may want monetary policy tightened, some experts see evidence that the program has helped boost the economy. In particular, the Fed's monthly purchases of mortgage-backed securities may be a key factor in boosting the housing market, which is seeing a strengthening rebound.

"It's certainly been a factor in record-low mortgage rates. And my forecast for 2013 is that mortgage rates are going to stay at very attractive levels, with the 30-year fixed [mortgage rate] between 3.5 and 4 percent, owing in large part to efforts by the Fed," says McBride.