The U.S. Federal Reserve says it is ending its bond-buying program this week, but it assured investors that short-term interest rates would remain near zero for some time.
The announcement came amid growing worries about the global economy and recent market volatility.
The bond program was a 37-month, $1.6 trillion experiment aimed at kick-starting the U.S. economy and stimulating job creation. Economists said it provided consumers and businesses with cheap capital and kept interest rates near record lows.
The decision, announced as the Fed wrapped up a two-day policy meeting, is validation that the U.S. economy is improving, said Brad McMillan, chief investment officer at Commonwealth Financial.
“The Fed is actually explicitly saying for about the first time that we’re starting to plan for more accelerated growth than what we’ve seen in the past," McMillan said. "They’re saying we’ve made substantial improvement, and they’re starting to actually act on that. And I think that’s a significant step forward.”
On Wall Street, the reaction was less enthusiastic. Major indexes saw a minor sell-off as investors pondered the Fed’s willingness to raise interest rates. That might have been due to the Fed's modification of the time frame for rate hikes from “a considerable time” in the future to sooner, depending on economic data. That’s taking a somewhat more assertive tone, said Greg McBride, Bankrate.com’s senior financial analyst.
“I think the statement actually read a little bit more hawkish than expected, more so than last month, meaning that there’s more affirmation of the economy doing well and I think more of an emphasis on the fact that eventually they’re going to have to focus on moving interest rates up,” McBride said.
Most analysts think rate hikes won’t happen until at least the middle of next year. Less clear is the impact on the global economy as the U.S. central bank applies the brakes on monetary stimulus.
Speaking at the Peterson Institute for International Economics in Washington, investment guru Mohamed El-Erian said more volatility should be expected, especially in foreign exchange markets, "because we’re going from a world of multispeed central banking to multitrack central banking."
"In the old days," El-Erian said, "everyone was doing the same thing, just different magnitudes. Now, we have two central banks that are lifting their foot off the accelerator — the Bank of England and the Fed — and we have two other central banks that are putting their foot more on the accelerator — the ECB (European Central Bank) and the Bank of Japan."
Experts say rising rates could lead to more investment dollars flowing into the U.S., further slowing growth in emerging markets. But, they add, a higher-valued dollar would also make U.S. exports more expensive.
