Fed Stands Pat: Keeps Stimulus At $85 Billion Per Month

on June 19 2013 2:07 PM
Federal Reserve building pedestrians
A view of the U.S. Federal Reserve building in Washington, D.C. Reuters

The Federal Reserve Wednesday maintained its quantitative easing program at $85 billion per month to stimulate the U.S. economy and provide liquidity to markets, while also maintaining short-term interest rates.

In its statement, the central bank said, "Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. "

The Fed added: "Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable."

In the institutional investor community, the "hawks" argued that the Fed should have started to reduce its quantitative easing program this month, saying it artificially depressed interest rates and distorted prices in the stock, bond and commodity markets.

Conversely, the "doves" argued that the Fed should have maintained or even increased its securities purchases at this juncture, saying the program has not only provided vital liquidity to credit markets but also injected much-needed stimulus at a time when fiscal stimulus has been absent because of U.S. and European austerity programs.

Has the Fed’s extraordinary monetary stimulus program -- started at the outset of the global financial crisis – succeeded? Many economists and social scientists argue it’s too soon to tell, and that the ultimate assessment may depend on one’s ideology or perspective.

For conservatives, the Fed’s quantitative easing program has underperformed, as it has not produced a robust U.S. economic recovery -- with the current one being the weakest in the post-World War II era.

For liberals and progressives, the Fed’s stimulus program has succeeded, as the intervention, combined with a series of other actions, prevented a catastrophe: a refreezing of the credit markets after the Lehman Bros. failure four years ago. Some economists and analysts argue the U.S. and even the global financial system would not have survived if the Fed and its companion central banks -- including the European Central Bank, Bank of England and the Bank of Japan -- had not intervened. 

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