Following a two-day policy meeting, Federal Reserve Chairman Ben Bernanke confirmed at a news conference Wednesday that the central bank could slow down its aggressive bond-buying initiative by the end of the year and completely exit in the middle of next year because the economic data is encouraging.
The QE initiative is meant to drive down borrowing costs, encourage investment, improve spending and hiring trends in the economy and increase asset prices. The move could send interest rates higher, though, which would be devastating for the federal and state governments.
Although the Fed hasn’t made a formal decision to halt the monthly $85 billion acquisitions, Bernanke did project that the United States economy could fall to between 6.5 percent and 6.8 percent by the end of 2014. Also, Bernanke stated that the Fed will remain flexible as it analyzes the state of the overall economy.
“The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” said the Fed Chairman. “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
In the end, if the jobless rate falls to under seven percent and the central bank’s inflation target of two percent is met then the measure would end altogether. However, Bernanke said the policy will be adapted to meet economic surprises.
“The fundamentals look a little better to us,” Bernanke told reporters. “In particular, the housing sector, which has been a drag on growth since the crisis, is now obviously a support to growth.” He added that increasing home prices has pushed up household wealth and enhanced consumer spending.
Bernanke attempted to reassure investors, who fear the end of QE and depend solely on easy money, that the stimulus wouldn’t be stopped immediately but rather “letting up on the gas pedal as a car picks up speed.”
The market reacted to Bernanke’s remarks – the minutes did not contain the decision to taper off QE – and sold off both stocks and bonds. The Dow Jones Industrial average ended the trading session 206 points lower, while the 10-year Treasury note rose to 2.3 percent. Gold and silver were also battered and opened up Thursday’s trading session $80 and $1.69, respectively, lower (at the time of this writing).
Since the economic collapse, the Fed has been maintaining an insistent monetary policy in order to combat the effects of the Great Recession. Instead of putting the fire out, the Fed has caused inflation, tremendous debt levels and near-zero interest rates that have not improved the economy and has hurt savers and investors.
When reporters asked about his future, Bernanke declined to address the “personal” matter and instead keep the press conference focused on monetary policy. Economic Collapse News has reported that Fed Vice Chair Janet Yellen is the likely candidate to succeed Bernanke.
Mainstream financial experts and public officials may see the Fed’s move as a step in the right direction and a sign that the economy is improving, but many argue that the fundamentals are still not sound and the collapse is still coming – this is a good example of the establishment’s rejection of these scenarios.