The U.S. Federal Reserve announced last Wednesday that it will continue dialing down its bond purchases, and sent feelers that it will be raising short-term interest rates next year, contingent on the U.S. economy’s continued recovery.
Previously, the Fed’s bond-buying economic stimulus initiative, known colloquially as “QE3”, or the third round of quantitative easing, was made to the tune of $85 billion per month. But with this month’s $10 billion taper, that reduces its bond purchases to $35 billion per month, or less than half of the original amount purchased. In an official statement, the Fed said that “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” hence its decision to taper bond purchases once again. The central bank is expected to cease stimulus completely by the end of the year, and may likely raise rates from near-zero levels sometime in 2015.
An increase in short-term benchmark interest rates would be indicative of the U.S. economy returning to normalcy, though this would also mean greater costs of borrowing for mortgages or auto loans, or for enterprises to expand. This is because prime rates charged by banks to their best customers are predicated on these benchmark rates.
Still, it would appear that Fed policymakers remain in a state of morass as far as the potential timing of a rate hike is concerned. All 16 voting officials said Wednesday that they expect interest rates to rise starting in 2015. Still, half of them expressed doubts that rates will rise above one percent, while the other half see rates breaking the one percent threshold, with one official forecasting a hike to about 3 percent.
According to Fed Chairwoman Janet L. Yellen, a lot of uncertainty remains vis-à-vis the potential path of short-term interest rates going forward.