Fed Ends Stimulus, But Rates to Remain Favorable

After three rounds of bond-buying, the Federal Reserve Board has ended its quantitative easing program — but easy money lives on, writes USA Today in a recent article. 

“We’re writing the eulogy on the most extreme Federal Reserve intervention in history,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, tells the publication. But interest rates will remain low for years to come, he says.

The Federal Open Market Committee (FOMC) announced this week that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. It sees sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. As a result, the committee decided to conclude the asset purchase program this month. 

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“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” the FOMC writes in a release. “This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

In December 2013, the Federal Reserve announced a $10 billion taper to its quantitative easing program, which had been purchasing $85 billion of mortgage-backed securities.

While widely expected the taper would cause mortgage rates to increase in 2014′s first quarter, the opposite happened, benefiting prospective homebuyers. The bellwether 10-year Treasury note, which started 2014 at 3.03%, has fallen to 2.33% today. 

Inflation – another widely predicted byproduct of the Fed’s program – has failed to materialize, too, USA Today writes. The Consumer Price Index, the government’s main gauge of inflation, has risen just 1.7% in the past 12 months and has averaged 1.6% since the first round of quantitative easing started in November 2008.

The Fed does remain wary of inflation, however, noting, “Although inflation in the near term will likely be held down by lower energy prices and other factors, the committee judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.”

A post-quantitative easing era will be marked by low short-term rates, low long-term rates and a higher dollar. For investors, this means that stocks will still look better than bonds or money market funds for some time to come, assuming corporate earnings continue to be robust.

But investors shouldn’t hold their breath for a blast of money to come from the bond market to the stock market.

“About 40% of the bond market is owned by investors who can’t sell,” LeBas says. 

Read the USA Today article here.   

Written by Emily Study

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