The Federal Open Market Committee (FOMC) concluded its December meeting and announced that it would begin the much anticipated winding down of its asset purchase program, popularly referred to as tapering QE3. The Fed will reduce purchases from the current $85 billion per month to $75 billon, with the reduction evenly split between Treasury securities and mortgage-backed securities (MBS). Beginning in January asset purchases will be $40 billion of Treasury securities and $35 billion of MBS.
At his press conference following the two day meeting Chairman Bernanke reiterated and expanded on the statement released to the press, noting that further reductions in the pace of asset purchases were likely at subsequent meetings, as long as the incoming economic data continued to show improving strength. He emphasized, once again, that the path of asset purchases was not pre-determined, that it would be data driven, and that future developments could motivate further declines or a pause in the pace of reductions. In response to questions Bernanke accepted the possibility that asset purchases could even re-accelerate if the economy stumbled at some point in the future. But he also emphasized that the Fed has a range of tools beyond asset purchases, including forward guidance and the interest rate on bank reserves held at the Fed to provide appropriate monetary stimulus in support of the recovery.
Based on the consensus of the forecasts prepared by meeting participants the gradual winding down of asset purchases would conclude the program sometime in the second half of 2014.
Bernanke also emphasized that the end of the asset purchases should not distract from the fact that monetary policy would still be highly accommodative with the Fed funds rate remaining at its current 0-.25 percent range at least as long at the unemployment rate was above 6.5 percent, and in all likelihood well past this point, as the committee monitors a range of other labor market indicators. Twelve of the 17 meeting participants anticipated that the first increase in the Fed funds rate would come in 2015. With these increases 12 participants expected the Fed funds rate to remain at or below 1 percent by the end of 2015, and 10 participants expected the Fed funds rate to be at or below 2 percent by the end of 2016. Over the longer term meeting participants viewed the appropriate level for the Fed funds rate to be between 3.50 and 4.25 percent.
Inflation, the other half of the Fed’s dual mandate, entered the discussion with Bernanke noting that the Fed’s charge was to keep inflation from getting too low, as well as too high. Bernanke shared that discussion among committee members included the possibility of an inflation floor as a policy guide, but the committee deemed it not necessary at this point. The expectation among participants was that inflation would gradually rise toward the target 2 percent over the next several years.
The stock markets responded positively, jumping at the 2:00 pm release of the Fed statement to the press and rose throughout the day on the Fed’s endorsement that the economic recovery was gaining strength and sustainable.