WASHINGTON (MarketWatch) — Federal Reserve revealed in the
minutes of its June meeting released Wednesday that it has decided to end its
asset-purchase program in October if the economy stays on track. Market Watch, July 9, 2014, 3:37 p.m. EDT. By Greg Robb
According to
the new plan, the Fed will make a $15 billion final reduction at its October
meeting, after trimming it by $10 billion at each meeting up to that point. Fed
officials said that members of the public had asked them if the Fed would end
the program in October or with a final $5 billion reduction in December. Most
Fed officials said that the exact end of the tapering issue will have no
bearing on the timing of the first rate hike. The Fed has said that rates would
remain near zero for a “considerable time” after the Fed halts its program of
bond purchases. An end of the asset purchases will “set the clock on eventual
tightening — which we think could start as soon as March 2015,” said Jim
O’Sullivan, chief U.S.
economist at High Frequency Economics. Stocks dipped
immediately after the Fed minutes were released but quickly moved higher. Bond
yields also had a brief move higher after the report.
The minutes
also reveal that Fed officials had a lengthy discussion of its exit strategy. The central
bankers generally agreed to keep reinvesting the proceeds of securities that
mature on its balance sheet until after it had hiked interest rates. Fed
officials also agreed that the rate of interest on excess reserves would play a
“central role” in moving rates higher when the time comes. It will have an
overnight reverse-repo facility with an interest rate set below the IOER rate [the interest rate the FED pays on commercial banks' excess reserves is often called the IOER rate]. The spread would be “near or above the current level of 20 basis points and
give the Fed adequate control over interest rates.” A reverse repo is when the
Fed accepts cash from counterparties such as banks and money-market funds on an
overnight basis in return for a security. Responding to some criticism that the
Fed’s overnight repo facility might become too large and drown out private
market participants, the central bankers discussed some design features that
might limit its size. Several Fed officials said that they don’t think the
facility will become a permanent policy tool. Fed officials “signal a good deal
of comfort in managing policy with a high balance sheet,” said Eric Green, head
of U.S.
rates and economic research at TD Securities. There is “no appetite whatsoever
to sell assets,” he noted. The Fed holds a record $4.38 trillion of securities.
