Fed mulling sterilized bond purchases: report

Jon Hilsenrath of the Wall Street Journal reported last week that Federal Reserve officials are evaluating the possibility of a measure that the journal describes as "sterilized" quantitative easing. How would this work, and what would it be intended to accomplish? From the Wall Street Journal:

Federal Reserve officials are considering a novel approach to bond buying aimed at countering some of the worry that another round of asset purchases by the U.S. central bank could fuel inflation, according ...

WASHINGTON – The Federal Reserve on Wednesday left in place its monthly US$85-billion bond-buying stimulus plan, saying economic growth had stalled but indicating the pullback was likely temporary. Describing the nation’s job market as continuing its modest pace of improvement, the Fed repeated a pledge to keep purchasing securities until the outlook for employment improves substantially.

WASHINGTON — The Federal Reserve ramped up its stimulus to the economy on Wednesday, expressing disappointment with the pace of recovery in employment as contentious U.S. budget talks heighten uncertainty about the outlook. The central bank replaced a more modest stimulus program due to expire at year-end with a fresh round of Treasury purchases that will increase its balance sheet. It committed to monthly purchases of US$45-billion in Treasuries on top of the US$40-billion per month in mortgage-backed bonds it started buying in September.

The U.S. Federal Reserve is considering ending its extraordinary bond-buying program later this year. It might not sound like earth-shattering news, unless you follow the market closely and know that so-called quantitative easing is the foundation on which the American stock market rally has been built over the last few years. No “QE,” no record Wednesday for the S&P 500.