Thursday, May 19, 2011

The Fed Sits Still

The minutes of the latest Federal Reserve Open Market Committee meeting, dating back to the end of April, were released yesterday. The meeting focused on the strategy surrounding the Fed's portfolio of $1.5 trillion in Treasury bills, which are in addition to its $900 billion worth of mortgage-backed securities. The Fed's plan of buying up Treasurys, also known as quantitative easing or QE2, is scheduled to end in June, and the minutes of the meeting show that the Fed thinks it would take some extraordinary scenarios in order for there to be a third round of purchases.

But what about selling the portfolio the Fed has already accumulated? The consensus seems to be that they won't start disposing of their holdings until after they've begun raising interest rates. And that doesn't seem likely to happen any time soon: According to the minutes, "a few" of the members thought that raising the Fed funds rate "might" be warranted "later this year."

In other words, it's unlikely to happen until 2012. So after it concludes QE2 next month, the Fed is likely to spend the rest of the year sitting on its hands. Is that good news or bad news? That depends on whether you think this economy is still in need of outside intervention.

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