Fed Signals End of Interest Rate Increases

The Fed on Wednesday also sought to clarify its plans for its giant stockpile of Treasuries and mortgage bonds it accumulated in the wake of the financial crisis. A decade ago, the central bank tried to revive economic activity and reduce borrowing costs for things like cars and mortgages by cutting its benchmark interest rate nearly to zero, and by vacuuming up huge quantities of bonds.

The Fed’s bond-buying program was intended to encourage investors to buy riskier assets, like stocks and corporate bonds, by driving up the price of safer securities, like Treasuries and mortgage-backed securities. The Fed’s enormous purchases drove down interest rates because, as competition for available Treasuries increased, buyers were forced to accept lower rates of return.

As the economy recovered, the Fed decided to take away that crutch and since the fall of 2017, it has gradually reduced its holdings at a pace of about $45 billion per month. But the Fed said on Wednesday that it planned to stop relatively soon, maintaining a much larger presence in the bond market than it did before the 2008 crisis.

The decision has limited implications for the general public. Some Fed officials and outside experts think that the new approach has improved the Fed’s ability to influence economic conditions, like interest rates, but the practical difference is generally regarded as modest.

But it is a big deal for bond markets. The Fed is the world’s largest investor, and even small changes in Fed policy make large ripples. The decision was applauded by some investors, who argue that the Fed’s withdrawal from the bond market is contributing to the volatility of asset prices. Other investors, however, want the Fed to minimize its profile in the bond market.

In a final bow to markets, the Fed emphasized its plans were subject to change.

“The committee is prepared to adjust any of the details for completing the balance sheet normalization in light of economic and financial developments,” the statement said. It added the Fed was even willing to increase the size of the balance sheet, if necessary.

Article source: https://www.nytimes.com/2019/01/30/us/politics/fed-interest-rate.html?partner=rss&emc=rss