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Wednesday, September 17, 2014

Federal Reserve: Asset Purchases Remain on Track to Complete in October, Fed Funds to Rise to 1.375% End-2015

The Federal Open Market Committee stayed the course today, reducing asset purchases by another $10 billion, bringing the pace of purchases to $15 billion per month. The committee expects to end purchases at its October meeting. The FOMC restated its commitment to holding rates at near zero for a “considerable time,” however, revised their forecast for the Federal Funds rate, and now see it rising faster than had initially been anticipated.

The Federal Reserve will remain on target to end its Quantitative Easing program in at its October 28-29 meeting if the labor market conditions continue to improve. Beginning in October, the Committee will purchase MBS at a pace of $5 billion per month rather than $10 billion per month, and purchase longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.

The Committee reaffirmed 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.” Despite this, the updated forecasts show that when tightening does occur, it may be more swift than initially thought. The updated forecast shows the federal funds rate is expected to reach 1.375% by the end of 2015, up from the 1.12% forecast in the June meeting. The median Federal Funds Rate forecast for the end of 2016 has increased to 2.875%, up from 2.5%.



The Committee offered additional guidance this meeting on its plans to normalize policy. The Fed will begin raising the Federal Funds rate by adjusting the interest rate it pays on excess reserve balances. Any reduction in securities holdings will take place after an initial rate increase, and will be accomplished by discontinuing reinvestment of maturing securities. The Committee does not plan to sell any of its MBS portfolio as part of normalization.

Read the FOMC Statement
See the Forecast
Read the Policy Normalization Document

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