Citing the fact that unemployment remains high, mortgage rates are on the rise, credit is tightening and current fiscal policy is ‘restraining economic growth,’ members of the Federal Open Market Committee (FOMC) today voted once again to postpone tapering of the Federal Reserve's $85 billion-per-month bond purchasing program.
‘Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy,’ the FOMC wrote in a statement that is nearly a carbon copy of its previous statement in July. ‘However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.’
The Fed also downgraded its outlook for the economy, forecasting that gross domestic product growth will be roughly 2-2.3% this year – down from its July forecast of 2.3-2.6%. It also revised the 2014 forecast to 2.9-3.1% from 3-3.5%.
Some economists had predicted that the Fed would start tapering its bond buying program by about $15 billion a month starting in September – however, it now appears that it won't start curtailing the program until early next year.
And that's only if economic conditions improve. Previously, the Fed had said it would not begin tapering until unemployment fell to 6.5% and inflation rose to 2.5%. Currently, unemployment is about 7.3%, and inflation remains low at 1.5%.
‘Conditions have shown further improvement in recent months, but the unemployment rate remains elevated,’ the FOMC wrote. ‘Household spending and business fixed investment advanced and the housing sector has been strengthening, but mortgage rates have risen further, and, apart from fluctuations due to changes in energy prices, inflation has been running below the committee's longer-run objective, but longer-term inflation expectations have remained stable.’
The FOMC anticipates that ‘with appropriate policy accommodation, economic growth will pick up from its recent pace, and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate.’
To read the FOMC's statement, click here.