By Kevin Smith, San Gabriel Valley Tribune
Posted: 02/22/14, 6:40 PM PST |
America’s slow but steady recovery from the Great Recession has been fueled at least in part by government stimulus.
So it was not surprising when businesses and consumers became skittish in December after the Federal Reserve announced it would begin trimming its quantitative easing program. Fortunately, the cut was relatively minor — if you can call cutting $10 billion from an $85 billion-a-month bond-buying program minor.
The central bank began reducing its purchases of Treasurys and mortgage-backed securities in January and another $10 billion cut was announced later that month. Former Fed Chairman Ben Bernanke indicated that the Federal Open Market Committee will take “further measured steps at future meetings” to reduce the program, which began in September 2012.
In her Feb. 11 testimony before the House Financial Services Committee, newly appointed Fed Chair Janet Yellen said she supports Bernanke’s approach.
The Federal Open Market Committee has said that “economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated.”
The Fed softened the impact of its pullback by signaling that it plans to keep short-term interest rates at record lows for longer than previously thought.
That came as welcome news to investors, who boosted the Dow Jones Industrials by nearly 200 points following Yellen’s most recent testimony. Still, the Fed’s action signals a pullback in the government support that has helped put the U.S. economy back on track.
Will further cuts undermine the shoring up that has occurred? Michael Carney, an economist at Cal Poly Pomona, doesn’t think so.
“Everyone knows that they have to scale it back at some point,” he said. “I think the market anticipated it to some extent because the Fed had given hints before, which scared investors quite a bit. But the market’s taking it quite well. And if the Fed believes that the economy is doing OK … then stock prices should go up.”
Wall Street definitely ended 2013 on a high note. The Standard & Poor’s 500 index had its best year since 1997 with an annual gain of nearly 30 percent. The Dow Jones Industrial Average posted a yearly gain of 26.5 percent and the Nasdaq composite index rose 38.3 percent for the year.
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