Fed Stays the Course on QE3, but for How Long?

The central bank once again continues monthly asset buys, but markets want to know for how long?

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In a two-day meeting that concluded on Wednesday, the Federal Reserve's Open Market Committee chose to remain steadfast in its latest round of monthly stimulus and near-zero interest rates.

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Members of the committee, the central bank body that sets interest rate policy, in a statement characterized economic growth as "modest" and painted a picture of an economy that's recovering, but with some weak spots.

"Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated," said a Fed statement released at the conclusion of the meeting. The committee also acknowledged that while household and business spending have grown, higher mortgage rates and tight fiscal policy have been a drag on economic growth.

Many analysts expected the Fed to hold steady in its current policy pattern in its July meeting, but as the fall approaches, chatter is growing about when the Fed will pull back its third round of quantitative easing. "QE3," as it is called, consists of $85 billion in monthly asset purchases and was intended to stimulate the economy by encouraging lending and boosting the stock and housing markets, among other things.

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After the June Fed meeting, Fed Chairman Ben Bernanke indicated in a press conference that if the economy improved and inflation moved towards 2 percent in the near future, the FOMC could taper off of its monthly asset purchases by the end of 2013. That indication helped to send treasury yields spiking and the Dow Jones plummeting to its largest one-day loss for the year. Since then, the chairman has soothed markets, explaining that tapering would depend upon whether or not economic data meets forecasts.

The guessing game for when the Fed will dial down its stimulus is in full swing. The FOMC has three more meetings scheduled this year, in September, October, and December, and the bank could choose any one of those – or none – for announcing a taper. Among analysts, there is no consensus on exactly what might happen. A still-shaky economy may need stimulus through at least September, says one expert.

"I have a difficult time seeing how they can taper in September," says Greg McBride, senior financial analyst at Bankrate.com. "That backdrop of slow growth, high unemployment, low inflation – I think all of that argues for maintaining the stimulus."

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Others take a different view on the economy's health. Citing steady job growth, not to mention the fact that he anticipates steady GDP growth, one analyst says the economy is showing that it's ready for less support.

"I think they're committed to doing it in the fall," says Frank Fantozzi, president and CEO of Planned Financial Services, a Cleveland-based financial services firm. "Barring some major economic change in the U.S., I don't see why they would not."

While QE3 may shift in the near future, the Fed's near-zero interest rate policy is likely to be in place for quite a while. The central bank says it expects to keep the federal funds rate at 0 to 0.25 percent as long as the jobless rate is above 6.5 percent and inflation is below 2.5 percent. Currently, the jobless rate is at 7.6 percent, and today's GDP report showed that core personal consumption expenditure inflation was at only 0.8 percent in the second quarter.

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