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Fed Tapers Bond Purchases by Another $10 Billion, but Pledges to Keep Interest Rates Low for a “Considerable Time”

H.S. Borji
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Fed Tapers Bond Purchases by Another $10 Billion, but Pledges to Keep Interest Rates Low for a “Considerable Time”

The Federal Reserve announced today it plans to reduce the pace of monthly asset purchases by another $10 billion, paving the way for the full elimination of record stimulus next month.

The Federal Open Market Committee voted to reduce the central bank’s holdings of mortgage-backed securities and Treasury securities for the seventh time in as many meetings. Beginning next month, the Fed will reduce its holdings of mortgage-backed securities from $10 billion per month to $5 billion, and reduce its holdings of Treasury securities from $15 to $10 billion.

The central bank held its target for the overnight rate at 0.25 percent, as expected.

“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” read the official FOMC policy statement. “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.”

However, the Fed assured interest rates would remain at record lows for a “considerable time” after the end of its record-setting bond purchase program.

“The Committee continues to anticipate, based on its assessment of these factors, 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,” the statement said.

Accompanying today’s rate statement was a quarterly summary of economic projections from top Federal Reserve Officials.

Central bankers revised their outlook on 2014 growth to between 2 percent and 2.2 percent, down from the June projection of between 2.1 percent and 2.3 percent. The Fed revised its 2015 outlook to 2.6 percent to 3 percent, down from the previous 3 percent to 3.2 percent range.

Long-run GDP growth is forecast to run at between 2 percent and 2.3 percent, little changed from the June projection.

The 2014 outlook on inflation was unchanged from the previous forecast. Personal consumption expenditures (PCE) inflation is forecast to range between 1.5 percent and 1.7 percent this year, and core PCE is forecast to rise between 1.5 percent and 1.6 percent.

Today’s decision comes amid growing evidence the US economy was regaining momentum after a disastrous first quarter that saw gross domestic product contract at an annual rate of 2.1 percent. The US economy rebounded in the second quarter to grow 4.2 percent annually. Estimates about third quarter growth vary, but the general consensus says GDP growth will top 3 percent in the September quarter.

The labour market recovery has offered one of the most convincing signs the US economy back on firm footing. The February-July period saw nonfarm payrolls increase by more than 200,000 each month, the first stretch of its kind since 1997. In the process, the unemployment rate fell to a nearly six-year low of 6.1 percent.

The markets expect the Federal Reserve to make one final stimulus cut of $15 billion at the October policy meetings. The minutes of the June 17-8 FOMC meetings revealed those intentions, as policymakers appeared poised to slowly begin normalizing monetary policy.

The tapering process was initiated in December 2013 by then-Chairman Ben Bernanke. Policymakers have voted in favour of stimulus reduction at each meeting ever since.

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