Some critics feared that the Fed would continue essentially printing money to pay for large budget deficits. With mixed evidence on whether the program was succeeding at pushing down long-term interest rates and improving market functioning, the Federal Open Market Committee indicated Wednesday that it will "gradually slow the pace of these transactions" and complete the purchases by the end of October.
Leaders of the central bank want to keep their options open on when and how to wind down the remaining programs. While they noted in the statement accompanying their decision that "conditions in financial markets have improved further in recent weeks," they know that financial crises can move in unpredictable ways.
Thus they gave no new signals about the program to buy $1.45 trillion in mortgage-related securities, which is helping maintain low mortgage rates despite credit markets that continue to be strained.
The purchase of mortgage securities should have a similar economic impact to the purchase of Treasury bonds: Both consist of printing money and expanding the Fed's balance sheet to drive down long-term interest rates. But the mortgage program is less of a lightning rod in Congress and the press, since it does not smack of the Fed financing government deficits.
Still, the planned gradual wind-down of Treasury purchases could offer a model for how the Fed will end the purchase of mortgage securities.
"This action suggests the Fed may also slow the pace of its purchases" of mortgage securities as it approaches the end of the year, said Dean Maki, chief U.S. economist at Barclays Capital, in a report.
Another looming question is what to do with the Term Asset Backed Securities Loan Facility, or TALF, which is designed to support lending to consumers and businesses. It is scheduled to expire at the end of the year.
Fed leaders view the program as successful in helping restart private credit markets, even though the volume of loans it has directly supported remains relatively modest. But it was enacted under an emergency lending authority, meaning that the Fed must end the program once it judges financial conditions to no longer be "unusual and exigent."
In further evidence of economic stabilization, the Commerce Department reported Wednesday that the trade deficit widened by less in June than was suggested in an estimate of gross domestic product released last month. The trade deficit rose to $27 billion in June, from $26 billion in May, due to higher prices for oil imports.
