Fed prepares for last spurt of easy money flood

The flood of Federal Reserve money that has supported Wall Street and the rest of the U.S. economy for 2-1/2 years will shrink to a trickle with the conclusion of the Fed’s bond purchases announced on Friday.

The Fed said it will buy US$50-billion of Treasuries, the final series of government bond purchases that marks the last phase of the US$600-billion program it launched in November 2010 to prevent another recession.

As a result, once the purchases are concluded on June 30, the financial sector will receive only a fraction of the roughly $100 billion a month in easy money it has been getting from the Fed.

The conclusion of the Fed’s bond-buying program, known as “Quantitative Easing 2,” does not mean the stimulus will come to a complete stop. The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 billion to $16 billion per month.

While still a lot of money, it is a huge step down from stimulus levels at the height of the buying campaign, dubbed by markets as QE2 because it was the second round of Fed asset-buying in the wake of the 2008 financial crisis.

A key aim of QE2 was to hold down long-term interest rates to stimulate investment in capital equipment and risky assets. It came almost eight months after the Fed’s first round of bond purchases, primarily in mortgage-related securities.

The initial bout of quantitative easing, worth $1.73 trillion, began in December 2008 and ended in March 2010. It was created to stabilize the housing sector, which was the epicenter of the financial turmoil and has yet to show signs of recovery.

The Treasury bond component of the first round of purchases totaled $300 billion, from March to October 2009.

The Fed’s buying assets has been controversial from the start. Critics say it is tantamount to printing money, and it has been credited with fueling a stock market rally but blamed for a surge in oil and food prices.

The end of QE2 has been well-flagged. The Fed said at the outset it would run until the end of June 2011.

Still, investors expect stocks, bonds, gold and the euro to fall after it ends, according to a Reuters poll of 64 analysts and fund managers last month.

Thomson Reuters 2011
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