The Federal Reserve concluded its last meeting of 2013 on Wednesday and decided to taper its $85 billion per month bond-buying program. Chairman Ben Bernanke held his final scheduled press conference.
Release Date: December 18, 2013
Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.
These are crucial lines from the Fed’s policy statement for understanding the Fed’s intentions with its $10 billion reduction in its bond buying program: “The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”
Here’s h0w to read that: Yes, we’re slowing the purchases. But that doesn’t mean we’re done trying to boost the economy. We’re not on a pre-set course, and will only continue slowing the pace if the economic data matches up to our expectations. That dovish language, combined with the hawkish slowdown of bond buying, helps explain why the stock market is up since the announcement.
Over the past several months, the market has moved in lockstep with expectations about what the Fed will do. A move toward winding down QE automatically meant stocks would decline; a move to continue it further meant they rose.
The pattern seems to have been broken. The announcement that the Fed will slow bond purchases by $10 billion a month sparked a rally on stock markets, with the Standard & Poor’s 500 rising 0.7 percent and the Dow Jones industrial average up 1 percent. Markets may have been assuaged by language in the Fed statement that the central bank will continue working to support growth even as it winds down its QE policies.
All year, there has been a dissenter at Fed policy meetings — Esther George, the president of the Kansas City Fed, who has opposed the central bank’s bond-buying program on grounds that it could spur financial bubbles.
At this meeting, though, George voted in favor of the policy statement, likely because the rest of the committee moved to begin winding down the bond-buying. But there was a new dissenter, from a different direction.
Eric Rosengren, president of the Boston Fed, voted against the action, because he “believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.”
The Fed released its leaders’ projections for growth, unemployment, inflation, and their own policies in conjunction with the new policy statement.
Most of the projections were little changed, but the leaders did indicate they expect unemployment to fall faster in 2014 than they expected in September. The central tendency of their projection is for 6.3 to 6.6 percent joblessness by the end of next year, compared with the 6.4 to 6.8 percent forecast in September.
Fed officials still overwhelmingly expect interest rates hike to arrive in 2015. 12 of the 17 leaders expect rate hikes to be warranted that year, compared with 2 who view interest rate increases as justified in 2014 and 3 in 2016.
Our own Ylan Mui asks what framework the FOMC will use to decide the pace of further tapering and whether they would expect the QE bond buying to end by the summer of 2014 as Bernanke has previously indicated.
Bernanke said it is unlikely the bond purchases will be finished by summer, and are more likely to wait until the end of 2014. He expects the FOMC to taper further at each meeting assuming the economy holds up, possibly pausing if the data changes.