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Fed to Curtail Bond Buying Program

For better or worse.

12:00 AM, Jul 12, 2014 • By IRWIN M. STELZER
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Many Fed watchers approve this normalization of monetary policy. They feel that whatever benefits these purchases might once have had, printing money to pay for asset purchases no longer has much positive effect, and does create distortions in investment patterns that will sooner or later create a new set of problems for the macroeconomy. This sigh of relief at the termination by the Fed of its purchase program does not depend on the future accuracy of Fed forecasts, but on objections to the program as such, regardless of the economic outlook.

The Fed takes a subtly different view. It says its decision to halt its experiment in monetary stimulus in October will stand “If the economy progresses as [we at the Fed] expect. … Participants [in the policy meeting] generally agreed that if the economy evolved as they anticipated, the program would likely be completed later this year. … The [monetary policy] Committee will closely monitor incoming information.”

This is more than a little disingenuous, since if the economy and other indicators disappoint—fall below Fed forecasts as they always do—the Fed can nevertheless end the bond-buying program based on new forecasts of future growth. That is, after all, what it has just done—we got it wrong, we were overly optimistic, but our new forecast of future developments is as cheery as the old, wrong one, so we will proceed as planned. In favor of the Fed it should be noted that its decision to tighten policy, based on expectations of an improving economy, was taken before the latest generally positive report that 288,000 new jobs had been created in June. So such new data as we have constitutes a bit of balm on the recent wounds and old scars of Fed forecasters.

There is a real question as to the effect of the Fed’s change of direction: is it a meaningful change? Chair Janet Yellen has promised that the end of asset purchases does not mark the end of low short-term interest rates. The minutes declare that even when the labor market and inflation rates meet Fed targets, “economic conditions may, for some time warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” The internal discussion at the Fed now centers not on whether, but how to keep short-term rates low.

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