Fed To Continue Tapering; No Change In Policy

Posted by Patrick Barnard on June 18, 2014 No Comments
Categories : Required Reading

The Federal Reserve will continue to taper its bond-buying program by another $10 billion per month come July, reducing its purchase of agency mortgage-backed securities to a pace of $15 billion per month rather than $20 billion and reducing its purchase of Treasury securities to a pace of $20 billion per month rather than $25 billion.

As per the Federal Open Market Committee's (FOMC) announcement on Wednesday, the Fed remains optimistic about the economy, as ‘labor market indicators generally showed further improvement.’

‘The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually,’ the FOMC says in its statement.

The committee, however, remains concerned about the ‘elevated’ unemployment rate and, in particular, the slowdown in the housing market recovery.

As a result, the Fed's monetary policy is unchanged.

Many are expecting that the Fed will move to raise short-term interest rates once it completely winds down its bond-buying program, which, at the current pace, will happen by the end of this year. Although Fed Chair Janet Yellen got pretty specific a few months back when she said the Fed might decide to raise rates within six months of the completion of tapering, the FOMC has gone back to leaving it open-ended:

During a public statement on Wednesday, following the release of the FOMC's meeting minutes, Yellen said, ‘The committee's expectation for the path of the federal funds rate target is contingent on the economic outlook.’

‘If the economy proves to be stronger than anticipated by the committee, resulting in a more rapid convergence of employment and inflation to the FOMC's objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged,’ Yellen said in prepared remarks. ‘Conversely, if economic performance disappoints, resulting in larger and more persistent deviations from the committee's objectives, then increases in the federal funds rate target are likely to take place later and to be more gradual.’

To view the FMC's statement, click here.

To read Yellen's prepared remarks, click here.

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