- The Washington Times - Wednesday, October 29, 2014

The Federal Reserve on Wednesday put to rest the extraordinary measures it has deployed in the more than five years since it first used them to spur economic growth and recovery from the Great Recession.

By closing out a monthly “quantitative easing” program under which it has purchased $4.5 trillion worth of Treasury bonds and mortgage bonds issued by Fannie Mae and Freddie Mac, Fed officials signaled that they believe the economy is returning to normal after more than five years of convalescence from the worst recession and financial crisis since the 1930s.

A government report Thursday is expected to show that the U.S. economy grew at more than a 3 percent annual pace during the summer, putting in its most robust performance in years. Moreover, unemployment has fallen below 6 percent amid the best surge in jobs since the 1990s.

The Fed issued a statement after a two-day meeting of its rate-setting committee, citing “the substantial improvement in the outlook for the labor market” and “sufficient underlying strength in the broader economy” as reasons for abandoning the increasingly criticized bond-buying program.

While wage growth remains anemic, the Fed said, job gains have been solid and the “underutilization of labor resources is gradually diminishing,” enabling consumers to keep spending at a moderate pace.

As expected, the Fed said it would keep short-term interest rates near zero for a “considerable time” longer to continue to nurture growth in the economy.

The expectation that the Fed will start to move interest rates up to more normal levels by the middle of next year, however, spurred a mildly negative reaction in financial markets. The Dow Jones industrial average closed down a modest 31 points, or about 0.18 percent, in trading Wednesday as the markets digested the Fed’s moves.

Other markets also posted slight declines. The Standard & Poor’s 500 index fell 2.75 points, or 0.14 percent, to 1,982.30, while the Nasdaq composite fell 15.07 points, or 0.33 percent, to 4,549.23.

The Fed’s statement did not acknowledge the slower growth in the world economy, recent drops in the stock market or other risks, suggesting that it was mostly focused on the steadily improving labor market in making its decision to end the stimulus program, said Paul Edelstein, an economist at IHS Global Insight.

He said that decision and other subtle changes in the Fed statement’s wording were “fairly hawkish” and signaled that the Fed is intent on raising interest rates next year. He noted that all of the Fed’s hawks voted for the decision while its most noted monetary dove — Narayana Kocherlakota, president of the Federal Reserve Bank of Minnesota — was the lone dissenter.

The Fed’s move was applauded by House Financial Services Committee Chairman Jeb Hensarling, Texas Republican, who said the stimulus program “overstayed its welcome.”

“The end of [quantitative easing] is good news. While many believe monetary accommodation was necessary in 2008 and 2009, the Federal Reserve allowed its extraordinary measures of the financial crisis to become its ordinary policy,” he said.

Mr. Hensarling expressed concern that the Fed’s loose money policies in recent years may have inflated yet another financial market bubble, although he did not say what markets he thinks have become too frothy.

Economists say the Fed’s easy money policies were — intentionally — an elixir to the stock and bond markets. The Fed was seeking to increase stock prices and push interest rates lower to increase confidence and spending in the broader economy.

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