The Federal Reserve's minutes on Thursday hinted at an earlier-than-expected end to its unprecedented bond buying program, triggering a sell-off in equities as investors worried about an end to historically low interest rates. The upside? Analysts say this is the Fed's way of weaning markets off the drug of quantitative easing and reflects the central bank's confidence in the U.S. economy.
Minutes of the Fed's December policy meeting showed that officials were split on when to halt the bond buying programs that have been adding $85 billion a month to the central bank's assets. A few wanted the programs to continue until the end of 2013, several others called for them to end well before then and some want them halted right away.
The minutes also left no clear sign of the future course the central bank would take, leaving the date of the potential winding down uncertain and unnerving markets. In September, in an unprecedented move, the Fed linked its bond buying program to unemployment, pledging to continue the scheme until the U.S. jobless rate falls to 6.5 percent, from the current 7.7 percent.
According to Sam Chandan, president and chief economist with Chandan Economics, the Fed is trying to signal two things. The first is that the Fed believes that the U.S. economy is developing "its own momentum" and a continuation of the easy monetary policy is not warranted. The second is that financial markets need to get used to the idea that this is the beginning of the end of easing.
"They are signaling to the market that extraordinarily accommodative monetary policy is not something that will last forever," Chandan told CNBC Asia's "Squawk Box" on Friday. "They have done this in several ways – putting time frames around it, and with discussions around where rates might begin to rise. But the market hasn't internalized a lot of that.
"Unlimited addition of Treasurys to the Fed's balance sheet, which stood at $2.9 trillion on January 2, may create a huge problem down the road for the Fed when it wants to sell those bonds, analysts say. Already, bond yields are beginning to rise, with the 10-year yield hitting a near eight-month high of 1.904 percent on Thursday, up from Wednesday's 1.84 percent, which is also a spike.
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