FOMC Continues to Taper its Bond Buys

March 19, 2014 09:14 AM

As expected, the Federal Open Market Committee (FOMC) stayed its course and reduced the pace of its bond buys by another $10 billion per month. Also of note, the FOMC statement also dropped the use of a 6.5% unemployment rate target as a guide for raising interest rates. It will use a broad range of measures when it comes to making this decision.

The FOMC statement noted that economic growth slowed during the winter months, "in part reflecting adverse weather conditions." While inflation has been running below the FOMC's longer-term objective, it says the outlook for long-term inflation has remained stable. Of note, in the press conference following the release, the new Federal Reserve Chair Janet Yellen said that based ont he present path, FOMC would look to raise rates next fall.

FOMC noted that there is "sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions." For that reason, the committee feels another measured reduction in the pace of its asset purchases is warranted.

"Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month," the FOMC statement details. The committee says its "sizable and still-increasing holdings" of longer-term securities should keep downward pressure on long-term interest rates, support the mortgage market and keep broad financial conditions accommodative.

The FOMC will continue to closely monitor incoming economic and financial developments and will continue to buy bonds and "employ other policy tools as appropriate" until the labor market outlook improves in a context of price stability. The committee again stated that if this information continues to broadly support its expectation for ongoing improvement in the jobs market and inflation moving back toward its longer-run objective, the FOMC will likely further reduce the pace of asset purchases in "measured steps at future meetings." However, the FOMC reiterated that these asset purchases are not on a preset course; rather, they are tied tot he committee's inflation and jobs outlook as well as its "assessment of the likely efficacy and costs of such purchases.

The FOMC reaffirmed its view that highly accommodative monetary policy is still appropriate. Therefore, the committee continues to anticipate "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored," the FOMC statement details.

When it begins to remove policy accommodation, the committee says it will take a "balanced approach" consistent with its long-run employment and inflation goals.

Also of note, FOMC says "it 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. With the unemployment rate nearing 6.5%, the Committee has updated its forward guidance." But FOMC also noted that this change does not indicate any change in its policy intentions that were set forth in recent statements.

Click here for the full statement.

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