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Insights into the FOMC’s latest policy decision

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Insights into the FOMC’s latest policy decision

Wednesday marked one of the most highly anticipated days in the world of finance, as the Federal Open Market Committee wrapped up its two-day policy meetings in Washington. Shortly after the meetings ended Federal Reserve Chairman Ben Bernanke announced the central bank would not reign in record stimulus, as economic data over the past month wasn’t compelling enough to warrant a shift in monetary policy. As expected, the benchmark lending rate was left unchanged at 0.25 percent. The pace of monetary easing remains at $85 billion.

For the past several months market participants have weighed the likelihood of a bond taper. While most agree the Fed will shift its policy sometime this year, the pace and timing of this shift has been hotly contested. The majority of economists surveyed by Bloomberg said the first wave of bond tapering would occur this month, to the tune of $10 billion.

With only two FOMC meetings left this calendar year, market participants have shifted their attention back to the data in order to determine whether the economic growth engine will accelerate fast enough to warrant a taper before the end of the year. With the hiring season upon us, there is reason to believe job growth can pick up in time for the December 17-18 FOMC meetings.

The US unemployment rate reached 7.3 percent in August, the lowest since December 2008. However, with 169,000 nonfarm payrolls added last month and only 104,000 the previous month, the unemployment rate is dropping for the wrong reasons. Labour force participation—the proportion of working age people holding a job or looking for one—fell to 63.2 percent in August, the lowest in 35-years. Declining workforce participation adds further layers of complexity for the Fed.

Interest rates are expected to remain at record lows so long as unemployment remains above 6.5 percent and inflation below 2.5 percent. The Fed will continue to mull over the data in order to reach a decision about the optimal time to begin tapering its monthly asset purchases. Since 2009, the Fed’s balance sheet has swelled to $3.66 trillion.

With a 2013 taper appearing less likely with each passing FOMC meeting, market participants should feel optimistic about the overall rate of recovery, and the Fed’s forecasts for growth over the next two years. On Wednesday the Federal Reserve said it expects gross domestic product to accelerate as much as 3.1 percent in 2014, and as much as 3.5 percent the year after that.

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