Fed signals end to QE2

The Federal Reserve is signalling that its $600 billion Treasury bond-buying program will end in June as planned because the economy has strengthened and companies are starting to hire more.

Ending a two-day meeting Wednesday, the Fed made no changes to the program. The decision was unanimous. The bond purchases were intended to lower loan rates, encouraging spending and boost stock prices. But critics worried that the purchases would feed inflation.

The Fed downplayed inflation risks. It acknowledged a spike in oil prices, but concluded the pickup in inflation will be temporary.

As it winds down stimulus, the Fed is now shifting its focus on when and how it should start boosting interest rates to prevent inflation from getting out of control. Economists think the Fed will start raising rates later this year or early next year. Higher rates would reduce borrowing and spending and make companies less inclined to boost prices.

“The Fed’s press release was almost a carbon copy of the March 15 press release,” wrote Patrick Newport, U.S. economist, IHS Global Insight, noting that the Federal Open Market Committee did not alter “its stance on the federal funds rate and the intended completion of the QE2 program by June 2011.”

Newport said the Fed is not likely to start reducing its balance sheet until late 2011 or early 2012. He expects the Fed funds rate will remain unchanged until the first half of 2012.

“The FOMC is expected to maintain a strong bias towards monetary accommodation until the performance of the economy consistently exceeds the threshold required for the pace of private sector employment growth to pick up substantially,” Newport wrote.