Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy.
As the Federal Reserve prepares to end its third round of bond buying this week, the central bank plans to hang on to the record $4.48 trillion balance sheet it has accumulated since announcing the first round of purchases in November 2008.
That will continue to keep a lid on borrowing costs, helping the Fed lift inflation closer to its target and providing support to a five-year expansion facing head winds abroad, from war in the Middle East to slowing growth in Europe and China.
Holding bonds on the Fed's balance-sheet limits the supply of securities trading on the public markets, which helps keep prices up and yields lower than they otherwise would be. That provides stimulus to the economy just as a cut in the Fed's benchmark interest rate would, according to Michael Gapen, a senior U.S. economist for Barclays PLC in New York.
"Preserving it will continue to support the economy," Gapen said. "The Fed message is we think we've done enough to generate momentum and keep the economy on the right track. Now we're going to wait and see how things go."
The Federal Open Market Committee plans to end its purchases of Treasuries and mortgage bonds at the next meeting Tuesday and Wednesday, according to minutes of the last gathering.
Chairwoman Janet Yellen opened the door to keeping a multi-trillion dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook. Shrinking the balance sheet to normal, historical levels "could take to the end of the decade," said Yellen at her news conference last month.
Fed quantitative easing has provided the Treasury market with a steady and consistent buyer, helping to keep yields lower than they otherwise would be. The central bank is now the largest holder of U.S. government securities.
If the Fed continues to hold the securities, it "will continue to put some downward pressure on rates relative to what they would have been had the Fed not had this balance sheet," said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $1.31 trillion, and a former Fed senior economist. "That's a factor that I think will linger."
The 10-year Treasury yielded 2.27 percent on Friday morning, down from 3.03 percent at the end of last year. It fell to a record low 1.39 percent in mid-2012. Yields averaged 2.65 percent since the first quantitative easing began in November 2008, compared with 6.95 percent before that in data since 1962.
The average rate on a 30-year fixed mortgage was 3.92 percent this week, still near a record low 3.31 percent in November 2012, Freddie Mac data show.
