The Federal Reserve is scheduled to announce the second cut in its bond-buying program in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth, according to The Wall Street Journal.
On Dec.18, the Federal Reserve announced a $10 billion quantitative easing, or QE reduction just in time for Christmas and the 100th anniversary of the privately run institution. The Fed’s latest action to begin paring the $85 billion-a-month program came just in time at the end of Ben Bernanke’s term as chairman, and the Jan. 6 confirmation of Janet L. Yellen. Bernanke’s last day as chairman is Jan. 31.
The pullback was a surprise because the Fed has said it would not raise short term interest rates, which are now near zero, until the unemployment rate reaches 6.5 percent or lower. The unemployment rate was 6.7 percent in December, according to the Bureau of Labor Statistics.
“Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month,” the Fed said in a December written statement.
The Fed will now buy $75 billion a month in mortgage and Treasury bonds as of January, down from $85 billion. The bond-buying program aims to lower long-term interest rates to encourage mortgage borrowers to spend and invest. The Wall Street Journal reported that the QE program will be further reduced to $65 billion a month from the current $75 billion. The announcement could come at the end of the Jan. 28-29 meeting.
The Fed moved sooner than expected with its tapering because of a stronger U.S. economy and job growth, the statement said. In December, the U.S. economy created just 74,000 jobs. The job creation numbers come with a big caveat because 347,000 people dropped out of the labor force.
Since 2008, the Fed’s bond-buying balance sheet has ballooned to $4.07 trillion.