The Federal Open Market Committee (FOMC) began laying out its framework for “normalizing” monetary policy moving forward. In particular, the Federal Reserve plans to end it quantitative easing program next month, with its purchases of long-term and mortgage-backed securities coming to a conclusion after its October meeting. Because of these purchases, the Fed’s balance sheet has now soared to over $4.4 trillion. Moving forward, the Fed’s assets will be reduced “in a gradual and predictable manner.” That does not mean, however, that the balance sheet will return to pre-crisis levels, as it is likely to remain at elevated levels for the foreseeable future. Still, the FOMC added the following language to its guidance, perhaps to allay worries from those who suggest that the Fed’s actions have distorted the marketplace:
The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
Moreover, the Fed is expected to start raising short-term interest rates, which have effectively been zero since late 2008, beginning next year. The guessing game is when that will occur, whether in the first half or second half of 2015. The FOMC’s principles state that rates will begin to rise when “economic conditions and the economic outlook warrant” such an action. In the monetary policy statement issued at the conclusion of its September 16-17 meeting, the FOMC said that “it will take a balanced approach consistent with its longer-term goals of maximum employment and inflation of 2 percent” in deciding to normalize rates. Nonetheless, the statement continues to assert that the federal funds rate will be at its current low levels for a “considerable time after the asset purchase program ends.”
The decision to continue stimulating the economy for the foreseeable future despite progress in the economy was supported by most of the FOMC participants. Fed participants remain concerned about “slack” in the economy, particularly in labor markets. Yet, inflation hawks on the FOMC dissented with these actions. Dallas Federal Reserve Bank President Richard W. Fisher felt that the pickup in economic growth warranted less accommodative policies; whereas, Philadelphia Federal Reserve Bank President Charles I. Plosser would objected to the long time horizon for keeping short-term rates at their current levels.
Chad Moutray is the chief economist, National Association of Manufacturers.