Fed ends bond buying, signals move toward rate hike

WASHINGTON – The Federal Reserve cited an improving economy Wednesday as it ended its landmark bond-buying program and pointed to gains in the job market – a key condition for an eventual interest rate hike.

The Fed did reiterate its plan to maintain its benchmark short-term rate near zero “for a considerable time.” Most economists predict it won’t raise that rate, which affects many consumer and business loans, before mid-2015.

But in a statement ending a policy meeting Wednesday, the Fed noted that the job market is strengthening. Its statement drops a previous reference to “significant” in referring to an “underutilization” of available workers.

Instead, the Fed said the excess of would-be jobholders is “gradually diminishing.” It also noted solid hiring gains and a lower unemployment rate, now 5.9 percent. One of the Fed’s major goals is to achieve maximum employment, which it defines as an unemployment rate between 5.2 percent and 5.5 percent.

That all suggested the Fed is looking toward an eventual rate hike.

Investors responded to confirmation that the Fed would end its bond-buying program and perhaps move closer to a rate increase by positioning themselves for higher rates. The dollar rose against other currencies, bond yields ticked up, the price of gold fell and stock prices slipped. The Dow Jones industrial average closed down a modest 31 points, or 0.2 percent.

The Fed repeated previous language that the likelihood of inflation running persistently below its 2 percent target has diminished, even though inflation is being slowed by lower energy prices and other factors. The Fed noted that expectations for inflation have remained stable, something it strives to achieve.

On balance, economists saw the Fed’s statement as showing less concern about unusually low inflation, which has helped delay a rate increase. Some analysts said the market reaction Wednesday suggested that investors saw the Fed statement as at least setting the stage for rate hikes starting sometime next year.

David Jones, chief economist at DMJ Advisors, said he was struck by the absence in the statement of any mention of global economic weakness, including the threat of another European recession.

Conservative critics of the bond-buying program hailed the move to end the purchases, a step they saw as long overdue.

The bond buying “has overstayed its welcome by years and by trillions” of dollars, House Financial Services Chairman Jeb Hensarling, R-Texas, said in a statement.

Michael Hanson, senior economist at Bank of America Merrill Lynch, said the Fed still appears likely to put off any rate increase until at least mid-2015.

“This isn’t the Fed rushing to the exits,” he said.

Hanson noted that while the Fed kept its “considerable time” phrasing, it added language stressing that any rate increase would hinge on the economy’s health. Previously, many analysts had interpreted the “considerable time” phrase to mean the Fed wouldn’t raise rates for a specific period after it ended its bond purchases.

The Fed’s statement was approved 9-1. The one dissent came from Narayana Kocherlakota, president of the Fed’s regional bank in Minneapolis. He contended that the Fed should have signaled its intention to maintain a record-low benchmark rate until the inflation outlook has reached the central bank’s 2 percent target. And he argued that the Fed should have continued its bond purchases at the current pace.

Kocherlakota is considered one of the Fed’s “doves” – officials who are more concerned about unemployment than are “hawks,” who worry more about the risk of high inflation. At the September meeting, two “hawks” – Presidents Charles Plosser of the Philadelphia Fed and Richard Fisher of the Dallas Fed – had dissented. On Wednesday, they voted for the statement.

The Fed’s decision to end its third round of bond buying had been expected. The Fed had said it would likely end the program after its October meeting if the economy continued to improve.