January 29, 2014 View entire issue of ANO         Close 

Fed to Cut Bond Buying Program Again

The Federal Reserve is ready to make a second cut to its bond-buying program, reducing its purchase of Treasurys and mortgage bonds from $75 billion per month to $65 billion per month, The Wall Street Journal reported Jan. 20.
The Fed is expected to announce the reduction following its Jan. 28-29 meeting, the last meeting to be attended by outgoing Chairman Ben Bernanke.

Since December 2012, the Fed has spent $85 billion a month buying bonds in an effort to push down long-term interest rates and encourage spending, hiring and investing. Last December, the Fed reduced its monthly bond buying to $75 billion, and Bernanke said that the agency would continue to cut around $10 billion per month from its bond purchases as long as the nation’s economy continued to strengthen, the Journal reported.

The Fed has yet to decide on a plan for raising short-term interest rates. In December, Fed officials said they would keep the rate near zero well beyond the point when unemployment falls to 6.5 percent.

The Journal reported that the jobless rate has been making a slow recovery. The U.S. Department of Labor reported that employers added only 74,000 jobs in December, well below the average gain of 214,000 experienced during the previous four months. The unemployment rate hit 6.7 percent in December.

The Fed declared in December 2012 that it would need to see a 6.5 percent unemployment rate before it considered an interest rate hike. However, it has since taken steps to distance itself from that unemployment marker because it has doubts about its reliability as an indicator of economic health.

Fed officials’ outlook overall is positive, especially given recent developments in the interest-rate futures market, where investors are banking on the likelihood that rate increases won’t begin until 2015.

When Janet Yellen assumes leadership of the agency Feb. 1 she will face many challenges, including the pitfalls of raising rates too soon, which could stall a recovery, or raising them too late, which could increase inflation.

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