Federal Reserve policymakers are expected on Wednesday to keep interest rates at their historic lows and to make no plans for a third round of quantitative easing after the second round ends on June 30.
“It’s clear to us and to most analysts that the Fed will end the $600 billion QE2 program as scheduled on June 30,” said Rob Williams, director of fixed income and income planning, Charles Schwab & Co. “They have left open the possibility that they would pursue a so-called quantitative easing three, but we think it’s unlikely. They have a lot of other tools in their toolkit that they can continue to use based on the pace of employment growth and economic recovery.”
One of those other tools, Williams said, is a continued reinvestment of principal and interest from bonds the Fed now holds on its balance sheet.
“They’ll keep the supply of bonds that they hold relatively stable, and that will help keep intermediate- to longer-term interest rates low,” he predicted. “As interest rates stay low, that will hopefully encourage lending, and that lending will encourage growth in the economy. The Fed’s primary tool is monetary policy and interest rates, and they’ve really done everything they can to keep interest rates low.”
The Federal Open Market Committee (FOMC) meeting will be its first since April 27 when it maintained the federal funds rate at 0% to 0.25% and said that conditions in the U.S. economy “are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
Like Williams, PIMCO Co-Chief Investment Officer and Founder Bill Gross expects the Fed to continue its use of the term “extended period.” Gross commented Monday on Twitter that QE3 “should be an informal program stressing ‘extended period’ language which supports front-end yields.”
Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.