Category Archives: Federal Reserve

FOMC Statement Shows Tapering Of Quantitative Easing Purchases

FOMC Statement Shows Tapering Of Quantative Easing PurchasesAccording to a statement provided by the Federal Open Market Committee of the Federal Reserve, the committee has approved another reduction of the Fed’s monthly asset purchases.

The adjustment will be made in February and cuts monthly purchases of mortgage backed securities from $35 billion to $30 billion and monthly purchases of Treasury securities from $40 billion to $35 billion.

FOMC began reducing its asset purchase under its quantitative easing program in January, when the monthly purchases of mortgage-backed securities and Treasury securities was reduced from $85 billion per month to $75 billion.

Citing its goals of maximum employment and price stability, the FOMC said that it has seen consistent improvement in the economy and specifically mentioned a lower, but still elevated unemployment rate. The statement also indicated that the FOMC expected labor markets to improve. 

FOMC Asset Purchases: How They Impact Mortgage Rates

The Fed initiated the QE program in an effort to control rising long-term interest rates, which include mortgage rates. Yesterday, the FOMC statement said that Fed expects its purchases of longer-term assets will continue to control long-term interest rates and mortgage rates while supporting mortgage markets.

FOMC’s statement reported that it sees the risks to its economic outlook and the labor market as having become nearly balanced. The FOMC is still looking for inflation to reach its 2.00 percent goal.

Fed Monetary Policy To Remain “Highly Accommodative”

The Fed intends to maintain a highly accommodative stance on monetary policy after the QE asset purchases end and the economy is significantly stronger. The current Federal Funds Rate of between 0.00 and 0.250 percent will be maintained at least until the national unemployment rate drops below 6.50 percent.

FOMC members reaffirmed their commitment to monitoring economic indicators as part of any decision to alter current QE measures or the Federal Funds Rate. 

Indicators Mentioned In The FOMC Statement Include:

  • Additional indicators of labor market conditions
  • Inflationary pressures and expectations
  • Readings on financial developments

FOMC statements have consistently included the committee’s assertion that no arbitrary benchmark alone will be sufficient for the committee to change either QE asset purchases or the Federal Funds Rate.

FOMC stated that it will seek a “balanced approach consistent with its longer-run goals of maximum employment and inflation at two percent.”

Although fears of tapering the Fed’s monthly asset purchases may persist, it appears that each FOMC decision to reduce asset purchases under the QE program indicates economic growth.

Fed Minutes Predicts Tapering Of Quantitative Easing Program

Fed Meeting Minutes Display Strong Signs Of Economic ReceoveryHousing Starts exceeded expectations and also beat October’s reading of 889,000. November housing starts were posted at 1.09 million against a consensus of 963,000.

This reading is more in line with the NAHB/Wells Fargo Home builder Market Index, which reached a four month high with December’s reading.

With that threat resolved and a new federal budget passed, builders can now proceed without worrying about setbacks caused by government shutdowns and legislative gridlock.

Building permits issued in November were slightly lower at 1.01 million than October’s reading of 1.04 million. Viewed as an indicator of future construction, and ultimately, available homes, it is not unusual for construction and permits to slow during the winter months.

FOMC Statement And Chairman Bernanke’s Last Press Conference

Throughout 2013, strong signs of economic recovery have led to predictions of the Federal Reserve tapering its quantitative easing program.

As each FOMC meeting approached, analysts predicted that the Fed would start reducing its $85 billion purchases of Treasury and mortgage-backed securities.

The asset purchases are part of the government’s quantitative easing program that was implemented to keep long-term interest rates and mortgage rates low.

The cut finally came on Wednesday as the FOMC made its customary post-meeting statement. Effective in January 2014, the Fed will reduce its monthly purchases by $10 billion.

The QE purchase will be split between $40 billion in Treasury securities and $35 billion in MBS. The Fed expects that the economy will continue recovering at a moderate pace.

The FOMC statement noted that the Fed will continue monitoring inflation, which remains below the Fed’s target rate of 2.00 percent, and the national unemployment rate, which remains above the Fed’s target rate of 6.50 percent.

The statement noted that asset purchases are not on a predetermined course, and that the Fed will continue to closely monitor labor market conditions, inflation pressure and economic developments in the U.S. and globally.

The Fed did not change its target federal funds rate of 0.00 to 0.25 percent, and would not do so at least until unemployment falls to 6.50 percent. Changes to policy accommodation are made with the Fed’s dual goal of achieving an inflation rate of 2.00 percent and achieving maximum national employment goals.

Bernanke Press Conference

Mr. Bernanke repeated key points of the FOMC statement, and noted that “highly accommodative monetary policy and waning fiscal drag” is helping with the economic recovery, but that the economy has much farther to go before it can be considered fully recovered.

Mr. Bernanke said that FOMC members saw the unemployment rate dropping from 7.00 percent in November 2013 to 6.30 to 6.60 percent in the fourth quarter of 2014. Improving labor markets and rising household spending were cited as signs of economic recovery.

Mr. Bernanke mentioned concerns about the high unemployment and underemployment rates and said that the Fed’s benchmarks for unemployment and inflation would not automatically trigger reductions in its QE asset purchases.

He also said that the committee did not expect to adjust the target federal funds rate immediately after the national unemployment rate reaches 6.50 percent. 

Mr. Bernanke repeated that the Fed’s actions regarding monetary policy and QE would be dependent on in-depth review of ongoing financial and economic developments, but said that further tapering of QE purchases is likely if the economy stays on its present course of moderate improvement.