Fed says it’s running out of bullets

The Federal Reserve has at last made its first signal that its extraordinary loose monetary policy will start to get tougher. The central bank is beginning to say that enough is enough. Only a few individuals believe the fed should continue until the end of the year.

Steve Goldstein
Jan. 3, 2013, 2:40 p.m. EST
Market Watch

WASHINGTON (MarketWatch) — For the first time since the financial crisis started five years ago, the Federal Reserve has at last made its first signal that its extraordinary loose monetary policy will start to get tougher.

To be sure, the change isn’t gigantic. There’s no sense that interest rates will increase from the near zero levels that have lasted for over four years.

And the Fed only last month initiated a new bond-buying program, to top off a plan to add more mortgage-backed securities that had only been around since September.

But, the minutes show, the central bank is starting to say, enough is enough. Of the crowd that supported bond buys, a few say they should continue until the end of the year, and several said it could stop, or slow, well before then.

There are two possible alternatives. One is that the Fed is expecting a big upturn in the economy, so that there just won’t be a need for more juice in the form of bond purchases.

That’s not really the case, however. The Fed only expects the unemployment rate in the mid-7% range by the end of the year, from 7.7% in November. And they don’t forecast any serious inflation issues, either.

So the alternative explanation is that the Fed just doesn’t think there’s much benefit to bond buys for the broader economy. The minutes say the program to buy MBS has been “effective” but also that the benefits were “uncertain” and that risks are growing as the balance sheet rises.

To put it differently: the Fed thinks the economy isn’t that great and there’s very little inflation to worry about, but its primary program to improve the economy doesn’t do very much.

It’s a clear admission the Fed is running out of gun powder. And that’s quite a shot it has fired to the markets.

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