Online financial news

The Federal Reserve sent mortgage rates plummeting two years ago when it initiated a series of large-scale bond purchases to boost the economy. But don’t expect the reverse to happen when those purchases finally end in a couple months, according to the head of the Federal Reserve.

“Our view is that the end of the program is unlikely to have significant impact on the market or the economy,” said Federal Reserve Chair Ben Bernanke, speaking of the end of the “quantitative easing” initiatives that have characterized Fed’s response to the economic downturn.   The Fed is scheduled to complete the current round of $600 billion in Treasury bond purchases in June, after which no further purchases are planned.   Speaking at a press conference following the conclusion of today’s meeting of the Fed’s Open Markets Committee, Bernanke said the Fed doesn’t plan to wind down the purchases gradually, but simply allow them to end as scheduled. Because the Fed has been signaling its intentions in advance, Bernanke said the markets know what to expect and shouldn’t react abruptly when the purchases end.   Bernanke said he takes the “stock view” that the pace of the bond purchases has less impact on markets than the size of the Fed’s bond portfolio.  Since current plans call for the Fed will to reinvest Treasury bonds and mortgage-backed securities as they mature, the size of the portfolio will remain constant for at least the short term.   He said that at some point, depending on how the economic recovery is proceeding, the Fed will cease to reinvest maturing securities, which he said would represent a modest tightening of economic policy.   Rising inflation is one factor that might lead the Fed to tighten economic policy to boost interest rates. However, Bernanke said the current mid-term outlook for inflation remains modest, and he expects current inflationary pressures from oil and commodity price increases to be short-lived.   Mortgage and other interest rates fell sharply when the Fed undertook its first round of quantitative easing, announcing in spring 2009 that it would purchase up to $1.3 trillion in Treasury bonds and mortgage-backed securities. A second round of $600 billion in purchases of Treasury bonds was begun last November and is the one due to conclude at the end of June.  

Similar Posts:

• Ben Bernanke is no Jose Mourinho – and we should all be grateful
• Bernanke: ’30s Lessons Helped Avert 2nd Crisis
• No defence left against double-dip recession, says Nouriel Roubini
• Eurozone crisis poses threat to US, warns Fed chairman Ben Bernanke
• Housing market to stay flat until 2013