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Wednesday, October 29, 2014

Fed Ends QE3, Sets Up for Further Tightening

The Federal Reserve terminated its open-ended bond buying program on Wednesday as expected, but went further, beginning to signal further policy tightening.

The most unexpected element of today’s statement is that the Federal Open Market Committee (FOMC) no longer believes that there is “significant underutilization” of labor market resources, instead saying that the underutilization is “gradually diminishing.” This change highlights the Fed’s shift away from an extremely accommodative stance toward eventual rate increases.

The FOMC continues to forecast near-zero federal funds rates for a “considerable time,” but now tied to “this month.” It also introduced some leeway in terms of timing, adding that “if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.”

The Fed has now completed its asset purchases associated with QE3, completing a tapering of purchases that it began last December. Since December, the Fed has reduced purchases by $10 billion at each meeting. Prior to today’s announcement, purchases had been reduced to $15 billion monthly.

Since the beginning of QE3 in September 2012, the official unemployment rate has fallen from 8.1% to 5.9%. During this period, inflation has remained contained, staying largely below the Fed’s 2% target.

The FOMC did not update its projections at this meeting, but will do so at its December 17th meeting.

Read the FOMC release.

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