The Federal Reserve ended its historic easing program Wednesday, ceasing the final $15 billion of monthly bond purchases it had made in an effort to keep the economic recovery going, in a statement that kindled market talk about a more hawkish central bank.
Though it ended the program, the Federal Open Market Committee kept the "considerable period of time" language that investors had considered crucial in the central bank's map for when it would raise interest rates. The "considerable" time refers to when the Fed will begin raising rates after the end of the monthly bond buying.
To that end, it said it would keep its short-term target funds rate anchored near zero until it sees more improvement from the economy.
But it also noted significant economic gains, expressed some doubt that low inflation would continue and struck a tone that some anticipated as a tip toward those on the committee who advocated the Fed start to consider tightening policy.
After some meandering stocks ultimately sold off after the statement. Interest rates moved higher as did the U.S. dollar.
"The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored," the statement said, in language that closely reflected pronouncements at previous meetings.
Other parts of the statement were new, though, and generated more talk than usual about when the Fed might change policy course.
"While the Fed did maintain its promise to keep rates low for a considerable time after this meeting, the rest of the statement sounds positive about the economy and thus reads more hawkishly from a market perspective," Dan Greenhaus, chief strategist at BTIG, said in a note. "While we're a bit surprised the Fed chose to move in a hawkish direction without an accompanying press conference, the fact remains that the U.S. economic expansion is continuing, the labor market is improving and general conditions are better today than they were say one year ago. If that's the case, then why shouldn't the Fed speak more optimistically?
"The Federal Reserve has done a fantastic job of communicating what their plan is," Michael Arone, chief investment strategist for State Street Global Advisors, said in a phone interview. "They are on track to begin policy normalization in the middle of next year, which is what they've talked about. They remain steadfast that they're going to rely on data to do that."
One area that drew some interest and departed from recent Fed statements was a somewhat more hawkish tone on inflation, which has been held in check by lower energy prices.
"Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year," the statement said.
The FOMC also said there has been "substantial improvement" in the jobs outlook and "underlying strength in the broader economy," which helped provide the impetus to "conclude its asset purchase program this month." The quantitative easing program had swelled the Fed's balance sheet past the $4.5 trillion mark in what the market colloquially calls "money printing."
The statement was approved with only one dissent, from Minneapolis' Narayana Kocherlakota, who advocated keeping QE in place until inflation breached 2 percent.
In recent months the Fed has equivocated as to what it would take to raise rates. Initially, the FOMC had set 6.5 percent unemployment and 2.5 percent inflation as benchmarks.
But unemployment has slid to 5.9 percent, while inflation, as reflected through the Fed's favorite measure, remains well below 2 percent.
In response, Fed officials have said the decision on rates would be "data dependent," though they haven't been specific about which data and what levels would generate a change in policy.
"The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run," the FOMC said in language that, again, mirrored past statements.
When instituting what has become known as QE3, the Fed also said it was an "open-ended" program, meaning that unlike its two predecessors there was no calendar date provided for when it would end.
There was no mention in the statement about what it would take to restart the asset purchase program, but the possibility is likely to stay near in investors' minds.
"Let's say it was suspended rather than ended," Michael Boockvar, chief market analyst at The Lindsey Group, said in a note.