Amid Strengthening Economy, QE3 End Nowhere in Sight

The FOMC says it will continue printing money and holding interest rates near zero.


Some analysts say that QE3 faces the problem of diminishing returns the longer it goes on.

By + More

The economy is strengthening, but that doesn't mean the Fed is taking its foot off the stimulus gas pedal. At the conclusion of its latest meeting Wednesday, the Federal Reserve's Open Market Committee announced no change to Fed policy, maintaining its latest round of quantitative easing and near-zero interest rates, as expected.

In its statement, the FOMC said it would continue its third round of massive asset purchases, known as QE3, as well as other policy moves as needed "until the outlook for the labor market has improved substantially in a context of price stability." Under QE3, the central bank has been purchasing $85 billion per month on mortgage-backed securities and U.S. treasuries. In addition, it maintained it would likely hold interest rates near zero as long as the unemployment rate is above 6.5 percent and inflation holds below 2.5 percent.

[READ: Volcker Advises Against QE3 'Hubris']

Still, the statement acknowledged recent positive indicators, like a strengthening housing market, increases in household spending, and solid job growth.

Though analysts did not expect a shift in policy, the discussion of when the Fed's third round of massive asset purchases will end has been growing even inside the central bank. The committee's January minutes show that some committee members are raising concerns about the potential consequences of all of that easing. Their worries included the possibility of inflation, as well as increased difficulty when it comes time for the Fed to unwind its stimulus policies and move all of those treasuries and securities off of its $3 trillion balance sheet.

Still, most members agreed that QE3 is working to boost the economy. Exactly to what magnitude it is responsible is up for debate. The Fed is definitely boosting the housing market, according to one analyst, which boosts the entire economy.

"The Fed, especially through the lending policies to banks and the fact that they bought a lot of [mortgage-backed securities], has certainly provided pretty meaningful support to the mortgage market," says Putri Pascualy, Credit Strategist for PAAMCO, a California-based investment firm. "I think they've been effective to that end."

[READ: Yellen: Don't Fear a QE3 Showdown]

Not everyone, however, is convinced of the policy's effectiveness in broadly boosting the economy.

"It depends on what you're measuring. Has QE3 boosted the stock market? Absolutely. Has QE3 boosted job growth and economic output? Maybe a little," says Greg McBride, senior financial analyst at

And some analysts say that QE3 faces the problem of diminishing returns the longer it goes on.

"They've done this a lot, and the marginal impact of every extra easing dollar is less," says Pascualy. "I think of it as: when I have chocolate, my first bar is always better than my 10th bar."

Although an expanding economy and improving job market may signal that it's time to look ahead to QE3's end, the recent turmoil in Cyprus is a reminder that the European debt crisis drags on, giving the Fed plenty of cover to continue the program, says McBride. In addition, the committee's statement seemed to acknowledge recent spending cuts under sequestration, noting that "fiscal policy has become somewhat more restrictive."

The committee also pulled back on its projections of economic growth. While most members saw 2013 GDP growing at 2.3 to 3 percent at the December meeting, they now believe it will be 2.3 to 2.8 percent. However, they also foresee unemployment being slightly lower in 2013 than previously thought. In December, members saw 2013 jobless rates staying between 7.4 and 7.7 percent. Now, they see this year's unemployment between 7.3 to 7.5 percent.

Indeed, the 12 voting committee members are still heavily in favor of maintaining the status quo. The shift away from that could be a long time in coming, but if the minutes to this month's meeting show more discussion of QE3 drawbacks, that would be "reassuring," McBride adds.

"Markets would be even more concerned if the Fed was completely turning a blind eye to the risks of their expanding balance sheet," he says.