After a decade of injecting trillions of dollars into the American economy, the US Federal Reserve is officially done.
In the workaday language of monetary policymakers, the Fed announced today (Sept. 20) that “In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.” Translation: The Fed will start shrinking the debt it accumulated by buying US treasuries and mortgage-backed securities during the recession and recovery.
The size of the Fed’s quantitative-easing program (QE) —in which it printed new money (well, electronically generated), then used it to buy securities—was unprecedented. Buying securities in order to feed money into the economy and influence short-term interest rates is common practice. But in close-to-zero rate territory, QE allows policymakers to buy longer-term bonds at a much larger scale, with the hopes that doing so will also pull down long-term interest rates as well. It was a desperate measure for a desperate time, inspired by the Bank of Japan’s response to floundering growth in 2001.
Unwinding the program launched in 2008 marks the beginning of a new era for the Fed.
Janet Yellen doesn’t want it to feel that way. The Fed chair has insisted that the unraveling of the asset program will be gradual, careful, and lengthy, unspooling over several years. She’s convinced the never-before tried process of quietly removing $4.5 trillion in debt won’t rattle investors. For today, at least, she was right: The Fed announced its historic policy change and the markets barely budged.