Fed's Unwinding Of Crisis Programs Expected To Push Up Interest Rates Very Gradually : The Two-Way The Federal Reserve in October will begin unwinding the extraordinary stimulus it used to battle the Great Recession. That means that over the long run, rates on car loans and mortgages could go up.

Fed's Unwinding Of Crisis Programs Expected To Push Up Interest Rates Very Gradually

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Federal Reserve policymakers said today they're keeping interest rates where they are for now. But they also said that next month they'll begin retiring an innovative financial tool that used to battle the Great Recession. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: You'll remember that as the recession worsened late in 2008, the Federal Reserve had already cut interest rates to near-zero to boost the economy. But the economy was still contracting, says Alan Blinder, a former vice chair of the Fed.

ALAN BLINDER: Ben Bernanke and company then were literally at a crossroads. So what do we do, give up and say that's all we've done and let's hope for the best, or start inventing new instruments?

YDSTIE: The Fed chair and his colleagues didn't give up. Instead they employed an unusual central bank tool called quantitative easing. They began by buying up mortgage-backed securities, the very financial instruments that triggered the financial crisis. The aim was to revive the housing sector. Also, the Fed started buying massive amounts of U.S. government bonds to help reduce long-term interest rates and support growth.

As a result, the assets on the Fed's balance sheet ballooned to $4.5 trillion from less than 1 trillion before the recession. Today Fed Chair Janet Yellen said the innovative program was a success.


JANET YELLEN: Stimulating a faster recovery than we otherwise would've had.

YDSTIE: A Fed research paper found quantitative easing lowered long-term interest rates by a full percentage point. Yellen said today the Fed's decision to wind down the program is a vote of confidence in the U.S. economy.


YELLEN: The decisions that we've made this year about rates and today about our balance sheet are ones we have taken because we feel the U.S. economy is performing well.

YDSTIE: The Fed is very gradually paring back its balance sheet to avoid spooking the financial markets. Those markets reacted calmly to the Fed action today. Alan Blinder says over the long run, the move will put upward pressure on interest rates.

BLINDER: If you're buying a car and you finance it with an auto loan, you'll pay a little more. If you're buying a house and getting a home mortgage, you'll pay a little more.

YDSTIE: But Blinder said that will happen very gradually over the next several years. John Ydstie, NPR News, Washington.

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