Wednesday, June 18, 2014

FOMC Continues Tapering Pace, Monetary Policy Highly Accommodative

The Federal Reserve will continue its current pace of tapering, reducing purchases by $10 billion per month. The Fed will now purchase mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and purchase longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.

The continued purchases will maintain downward pressure on longer-term interest rates, support mortgage markets and help make financial conditions more accommodative. If the labor market indicators and inflation rate continue to move in the direction consistent with the Fed’s dual mandate, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, as Federal Reserve Chairman Janet Yellen reiterated in her speech, the asset purchases are not on a preset course, and the committee’s decision will remain contingent on economic outlook. For this reason, Yellen warned, investors should avoid risky behavior, in spite of the current low volatility in financial market activity.

The Committee reaffirmed that a highly accommodative stance of monetary policy remains appropriate. It likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after asset purchases end. When asked to be more specific on the time schedule, Yellen responded that there is no mechanical formula and that it will depend on how the economy progresses.

Regarding economic progress, the Fed believes the economy is rebounding in the second quarter, which the Committee expects will continue. The unemployment rate is expected to decline to between 6.0% - 6.1% in 2014, although the rate of reduction may slow as discouraged workers reenter the labor market. PCE Inflation is expected to continue to move towards the Fed’s 2% target in the long run, but is projected to remain between 1.5% and 1.7% during 2014. The federal funds rate projections for 2015 and 2016 have increased since the March meeting, but Yellen posited that the increase may be attributed to the fact that there are new committee members. The fed will continue to consider a broad range of economic indicators in its monetary policy and is not limited to inflation and the unemployment rate.

The Committee believes that the drop in GDP during the first quarter was for transitory reasons. In the second quarter spending and production, among other indicators, have picked up. The current GDP projection is between 2.1% and 2.3%, however the central tendency range is notably lower than the March projection of 2.8%-3.0% because of the reduction in GDP in the first quarter.

Read the Federal Reserve FOMC statement.

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