Categories
Monetary policy U. S.

Option of bond purchases to stay

At the coming Oct. 28-29 meeting, the Fed is likely to dial down the amount of bond purchases (QE) to zero. However, I think the Fed will leave the option of QE open for some additional period.

The Fed could keep the clause that its QE program and other loose monetary policies are data-dependent, which means in unusual conditions, the Fed could restart bond purchases.

The Fed is certainly studying exit strategies of low interest rate but they will refrain their discussions on the topic at the meeting. This will reduce confusions to the market amid recent market turmoils. Interest movement is hampered by the strong dollar and low inflation expectation in the U. S. The Fed has been buy­ing mort­gage and bonds since 2012 in an ef­fort to hold down long-term in­ter­est rates and stimulate the econ­omy. The Fed has been on course to reduce QE by $10B a month and is expected to reduce the total purchase amount to zero this month.

Last week, St. Louis Fed president James Bullard suggested the Fed consider extending the QE program because inflation expectation appears to be low. However with the U. S. economy growing at 3% and unemployment steadily going down, it is hard to justify to extend the QE program. As a compromise and also as a strategy, I think the Fed will keep the QE option available for additional time and only to be used for unusual situations.