Future of Fed's Bond Buying Program Uncertain

In mid-December Federal Reserve Chairman Ben Bernanke assured the public that the Fed would continue its bond buying program indefinitely, and would at least continue it through 2013. Under this program the Fed will spend $85 billion a month on bonds: $40 billion in mortgage back securities and $45 billion in U.S. Treasury bonds. However, minutes from the most recent January meeting of Fed officials have been released and it appears not everyone is one the same page. Some officials wanted to continue the program though 2013, some want to end them sometime during the year, and some even want to end the program immediately.

Although this program, known as quantitative easing, would help keep long term interest rates low, some Fed officials feel it should be stopped sooner rather than later. The Fed's original intent was to help the labor market with this bond buying program. However, a definite goal was not set like the one that was set regarding short term interest rates. The Fed vowed to keep short term interest rates near zero until the unemployment rate falls to 6.5%. This bond buying program was initially proposed to help until the job market improves "substantially," a goal as vague as the minutes released from the meeting between the Fed officials. Stopping this quantitative easing policy could very well shock the market as the Fed's bond buying encourages lending, spending, and investing. It would also help keep long term interest rates low.

Another concern of the Fed is and always has been inflation. Bernanke said that quantitative easing would only continue if inflation remains steady. The Fed is buying bonds by essentially just creating money. The Fed hopes that its commitment to an economic turnaround will encourage private sector industries and companies to play along and act in ways that encourage growth and employment.

 Works CitedHilsenrath, Jon. "Fed Divided Over Bond Buys." Wall Street Journal. N.p., 3 Jan. 2013. Web. <http://online.wsj.com/article/SB10001424127887324374004578219744175847974.html?mod=WSJ_economy_LeftTopHighlights>."The Federal Reserve: The Other Mandate." The Economist. N.p., 15 Dec. 2012. Web. <http://www.economist.com/news/finance-and-economics/21568426-fed-specifies-unemployment-threshold-raising-rates-other-mandate>.