Midday Report: Fed to Wind Down Stimulus Program, but When?

The Fed prepares to end a controversial program, and its next move could have major implications for investors.

The Federal Reserve's bond-buying program has been one of the main drivers behind the market rally over the past nine months. The Wall Street Journal reports the central bank has now decided what to do next, but the timing is still up in the air.

The Fed has been buying $85 billion worth of bonds each and every month since September. The intent has been to boost the economy and encourage new borrowing and spending by businesses and individuals, which would hopefully lead to more hiring.

What the Fed wants to do next is start to unwind the program, but not all at once. The Journal says that officials want to make a gradual exit, in order to maintain lots of flexibility so that they can adjust to ups and downs of the economy.

Fed Chairman Ben Bernanke has previously indicated he wants to avoid a mistake that has been made on other occasions, when the Fed halted stimulus programs too quickly or too abruptly. So the new plan is designed to wean the economy from the support it's been getting, and to give the Fed the ability to react more quickly to changes in the economy – and perhaps the markets too. The central bank wants to manage market expectations to avoid overreactions.

Some Fed officials say the economy is strong enough right now to begin withdrawing that stimulus as soon as this summer. Others support the idea of gradually doing so, but say the time is not yet right. They want to wait until the evidence is clear that economic growth is firmly on track.

A number of Fed officials give public speeches this week that could give a better indication about the timing, including Bernanke. He will discuss the long-term prospects for the economy when he gives the commencement address at Bard College on Saturday.

Fed policymakers meet again in June, July and September.

-Produced by Drew Trachtenberg

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