There seem to be growing consensus within the Federal Open Market Committee for the Federal Reserve to discontinue its economic stimulus program by the end of 2013. The FOMC minutes from its June 18-19 meeting reveals that nearly half of the 19 officials participating in the monthly gathering “indicated that it likely would be appropriate to end asset purchases late this year.”
After last month’s meeting, chairman Ben Bernanke said that the central bank planned on scaling back its bond-buying program, which bump up spending to $85 billion each a month since September 2012.
Bernanke also said that the Fed would terminate the program around mid-2014—but with a caveat—as long as the economy continued to grow. The release demonstrates the division on just when the Fed should begin the reductions as it winds the program down.
The purpose of the program is to keep interest rates low in the hope that it will encourage business investment, consumer spending and job creation—economic growth.
Short-term interest rates
Most of the bankers agree that the decision-making process for both the asset-buying program and raising short-term interest rates are separate matters. Since late 2008, the Fed has kept short-term interest rates or the federal funds rate near zero.
The federal funds rate refers to the interest rate banks charge another bank for an overnight infusion of cash to ensure the borrower meets reserve requirement regulations. In addition, the federal funds rate will remain near zero for a “considerable time” even after the bond-buying program comes to a halt, according to the minutes.
Members of the FOMC who believe that it would “be appropriate to continue purchases into 2014,” continue to be vocal about their concerns that prematurely ending the program could compromise economic recovery.
Continuing the program
The proponents of continuing the asset-purchase program argue that the program has worked to help fuel the current recovery. However, emphasized that the “benefits continue to exceed the costs.” The pressure is on for the Fed to stay the course, to keep buying bonds to fuel economic expansion make “substantial” improvement in the job market.
Although recent jobless claims and employment situation data show an improved job market, this group believe that the Fed needs to continue the current monetary policy. Bernanke has expressed all along that the labor market–with an unemployment rate of 7.6 percent–needs to fall to a jobless rate of 6.5 percent before the Fed slows down the program and bring it to a close.
Officials in the Bernanke camp want to see “evidence of achieving the “projected acceleration in economic activity” prior to taking action to cut backs in the bond purchase initiative.
Some members of the committee want a more defined approach to communicating future decisions about the bond-buying program to investors and the public. One suggestion recommends that the Fed issues “quantitative thresholds” for certain economic metrics—much like it does for setting short-term interest rates.