Federal Reserve ends its multitrillion-dollar bond-buying program

Its bond-buying program of economic first aid is over. Did it do what it set out to do?

By BINYAMIN APPELBAUM • New York Times

WASHINGTON

In a series of sweeping campaigns to revive the American economy, the Federal Reserve has spent much of the past six years purchasing trillions of dollars of bonds. Now it is done.

The Fed said Wednesday that the economy no longer needed quite so much help. It is the third time since 2008 the Fed has announced such a move, but this time officials and analysts say the decision is more likely to stick, signaling an important milestone in the nation's painfully slow recovery from the Great Recession.

The central bank still plans to keep short-term interest rates near zero for a "considerable time," it said in a statement after a two-day meeting of its policymaking committee. And it said it would replace maturing bonds to keep its holdings at about $4.5 trillion.

The bond-buying campaign has helped to fuel one of the longest bull markets in American history. The Standard & Poor's 500 index has risen 131 percent since the Fed started its first round of purchases in November 2008. The campaign has also helped to suppress borrowing costs. The yield on the benchmark 10-year Treasury has declined from 2.96 percent to 2.32 percent over the same period, even as economic conditions have improved.

The Fed critics' dire predictions, however, have clearly failed to materialize. Some Fed officials and economists warned that the bond purchases, often referred to by experts as quantitative easing, or QE, would devalue the dollar and drive up inflation. So far the opposite has happened.

The U.S. economy has outperformed other developed parts of the world, helping to strengthen the dollar, while inflation has remained so sluggish that the greater worry is now whether prices are rising too slowly.

Kim Schoenholtz, an economics professor at New York University, said the Fed's bond purchases were particularly effective and important in stabilizing the financial system and stimulating the broader economy in the immediate aftermath of the financial crisis. But he said that the impact of the purchases had diminished as conditions improved, and that it now made sense to end the program.

"I applaud the Fed's willingness to be aggressive, especially early on in the crisis, and it has made sense for the Fed to run a very accommodative policy," Schoenholtz said. "But we should not be surprised that monetary policy has diminishing returns."

Schoenholtz added that the Fed's quick and strong response helped to explain why the Fed was nearer to achieving its economic objectives than the European Central Bank or the Bank of Japan, both of which are now battling to avoid deflation.

Many House Republicans regard the bond purchases as a form of reckless meddling, and they have passed legislation to constrain the Fed's flexibility during future downturns. "I'm afraid the long-term legacy of the policy will reflect the harm it has done to our nation's seniors, savers, and all Americans faced with greater uncertainty and the possibility of a QE-induced bubble," Rep. Randy Neugebauer, R-Texas, said Wednesday.

The Fed started buying bonds for the first time in modern times because it had run out of other options. Under Ben Bernanke, then the Fed's chairman, the central bank cut its benchmark short-term interest rate to zero in December 2008, maxing out its primary means of influencing economic conditions.