Federal Reserve Reduces its Asset Purchases by $10 Billion to $75 Billion Each Month

By December 18, 2013Economy

The Federal Open Market Committee (FOMC) of the Federal Reserve has agreed to start “tapering” (or reducing) its asset purchases at its latest meeting. The FOMC had been purchasing $45 billion in long-term and $40 billion in mortgage-backed securities each month in an effort to boost economic growth. In its statement, the Fed has announced that it will scale back its purchases of type of security by $5 billion each, or by $10 billion in total.

In essence, the Fed will continue to purchase $75 billion each month from this point forward, making changes where needed. In its statement, the Fed writes:

“The Committee will continue to 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.”

The Fed is expected to completely end it asset purchases by mid-2014, stopping the latest iteration of “quantitative easing.” With that said, the FOMC statement cautions that future actions are not on a “preset course.” In saying this, the Fed is once again saying that Fed policy decisions will continue to be dependent on data, and future tapering will hinge on continued improvements in the economy.

One thing to keep in mind is that the Fed remains committed to highly accommodative monetary policies, even with this decision on long-term and mortgage-backed asset purchases. The Fed has said that it will continue to maintain its easier monetary policies until the unemployment rate hits 6.5 percent and/or long-term inflationary pressures exceed 2.5 percent. This suggests that short-term interest rates will remain near zero percent throughout much of 2014, and perhaps into 2015.

The Fed also released the economic projections that were used in making its FOMC decision. In general, these forecasts were somewhat similar for real GDP, but they predict better gains in the labor market. FOMC participants predict that real GDP will increase by 2.8 to 3.2 percent in 2014, which was not much different from the 2.9 to 3.1 percent range seen in the September projection. Referring to price stability, the Fed sees core inflation remaining below its target of 2 percent or less through 2016.

On the employment front, the unemployment rate is expected to improve to 6.3 to 6.6 percent by the end of 2014, a small improvement from the 6.4 to 6.8 percent range seen three months ago. Indeed, the FOMC statement refers to improvements in the labor market, even as they remain higher than we might prefer. The Fed does not see the economy reaching 6 percent unemployment or less until 2015 – a rate that some might see as “full employment.”

In making its decision to start tapering, the FOMC dissenter switched from an inflationary “hawk” to an inflationary “dove.” Eric S. Rosengren, the president of the Boston Federal Reserve Bank, was the lone dissenter this time around. He voted against tapering because he felt that it was “premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.” He felt that “the unemployment rate was still elevated and the inflation rate” was still quite low. Meanwhile, Esther L. George, the president of the Kansas City Fed, who had dissented in each of the past few statements and a well-known inflation hawk, voted for the rest of the FOMC to approve the actions taken.

Note that the make-up of the FOMC will change in 2014. James Bullard (St. Louis), Charles L. Evans (Chicago), Esther L. George (Kansas City), and Eric S. Rosengren (Boston) will rotate off of the committee as voting members, but they will still participate in the overall discussion. The new voting members for 2014 will be Richard W. Fisher (Dallas), Narayana Kocherlakota (Minneapolis), Sandra Pianalto (Cleveland), and Charles I. Plosser (Philadelphia). Fisher and Plosser are known inflation hawks.

In addition, Chairman Ben Bernanke’s term expires on January 31, and he is expected to be replaced by Vice Chairman Janet Yellen, assuming she is confirmed.  If Janet Yellen is the new Chair, President Obama is expected to nominate Stanley Fischer, the previous head of the Bank of Israel and the former chief economist at the World Bank, as the new Vice Chair.

Chad Moutray is the chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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