Federal Reserve To Continue Tapering At Current Pace

Posted by Patrick Barnard on September 17, 2014 No Comments
Categories : Required Reading

Citing the fact that the labor market continues to be weak and too many Americans remain unemployed, the Federal Reserve announced on Wednesday that it would continue to taper its bond buying program at the current pace of $10 billion per month.

That means, come October, the Fed will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.

‘There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger,’ Janet Yellen, Federal Reserve chairman, said during a press conference on Wednesday. (A video and transcript of the press conference can be accessed here.)

The announcement in effect shoots down any possibility that the Fed will accelerate the tapering of its bond buying program this fall: Several months ago, members of the Federal Open Market Committee (FOMC) hinted at the possibility of winding down the program as early as September, by reducing its bond buying by $15 billion or $20 billion per month.

The Fed also plans to continue holding short-term interest rates at 0% to 0.25% for a ‘considerable time’ after the asset purchase program winds down, using language that Yellen has used in previous press briefings.

Still, the FOMC continues to develop its plan for an eventual increase in short-term interest rates, which is expected to occur next year, based on individual forecasts by the committee's 17 members. The Fed on Wednesday published certain details of its plans for withdrawing from its current monetary policy.

The Fed also downgraded its forecast for economic growth in 2015: FOMC members now expect the economy to grow between 2.6% and 3% next year, compared to the June forecast of 3% to 3.2%.

Two FOMC members, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, voted against the decision to continue to taper at the current pace, arguing that economic conditions had improved enough to wind-down the bond-buying program sooner.

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