Fed To Maintain Stimulus Until 2014

Posted by Patrick Barnard on June 20, 2013 No Comments
Categories : Required Reading

13984_federalreserve.5.30 Fed To Maintain Stimulus Until 2014 The Federal Open Market Committee (FOMC) on Wednesday issued a revised economic forecast suggesting a faster-than-expected economic recovery – however, the Fed does not plan to taper bond buying until later this year.

Following the report's release, Federal Reserve Chairman Ben Bernanke held a brief press conference at which he indicated that bond buying would likely be tapered starting in the fourth quarter and completely finished by mid-2014, according to a Business Insider report.

‘If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,’ Bernanke told reporters. ‘And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.’

However, Bernanke indicated that the Fed would not make any policy changes until the unemployment rate falls to around 7%.

‘To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the [FOMC] 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,’ states a Federal Reserve press release. ‘The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.’

Despite inflationary risks and the impact of MBS purchases, which as of late have been causing turmoil in the treasury bonds market, Bernanke was cautiously optimistic, highlighting increases in household wealth and a reduction in large-scale layoffs. In addition, low interest rates have resulted in increased home sales, while rising home prices have provided some equity cushion for once-underwater borrowers.

Bernanke said despite the modest housing recovery, federal fiscal policy remains a significant hindrance to growth. With the government now the only major player in the secondary mortgage market, investors are concerned about the impact of a pullback, in particular the effect of eliminating the government guaranty on 30-year, fixed-rate mortgages.

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