The Fed is maintaining the status quo on interest rates, is not terribly worried about inflation and is still planning to end its massive buying program of mortgage securities at the end of March. All of this comes from a Fed statement following the Tuesday meeting of its policy committee. The news on interest rates sent the stock market higher as investors breathed a sigh of relief that interest rates will stay near zero. Nobody, for now, seems too concerned about the other part of today’s message, that the $1.25 trillion buying program that has been underway is soon to end.
The Fed’s purchase program became an intravenous feed of capital to a market that was near death last year. It helped keep mortgage rates affordable, helped institutions stay liquid, and probably kept the economy out of a depression. So now that the Fed is sufficiently comfortable with the economy’s momentum (I use ‘momentum’ loosely) to unplug the IV, should the markets take this is a confidence booster or not? Pimco’s Bill Gross has expressed some concern that the Fed’s buying, once gone, could be felt in markets far and wide because the program paid out huge money to institutions that presumably recycled the dollars into other investments, such as stocks. Turn off that supply of money and the buying power in the stock market, already weak, could flatline.
It’s not a cause for great worry, though, because the Fed has made it clear that it will resume buying if things begin to unwind. That makes great sense as it allows the Fed to stop this type of quantitative easing, which could lead to an inflation problem down the road, but it also let’s them stand at the ready should they be needed. I doubt that a declining stock market alone would be trouble enough to trigger a restart of the program but a sinking economy certainly would. And that’s a better kind of confidence than one you have to buy every day with government dollars.