United States Monetary Policy

United States

United States: Fed begins modest taper, leaves policy rate unchanged again

December 18, 2013

At its policy meeting on 18-19 November, the Federal Open Market Committee (FOMC) announced that it would finally start winding down its asset purchase program. The Fed explained that there has been, "cumulative progress towards maximum employment," in recent months and that it will therefore begin to "modestly reduce the pace" of its asset purchases. Starting in January 2014, the Fed will conduct purchases of USD 40 billion of long-term Treasury securities and USD 35 billion of mortgage-backed securities per month, down from USD 45 billion and USD 40 billion respectively. The Fed expects that maintaining a sizeable purchase program will continue to promote economic recovery.

According to the Fed, the economy continues to expand at a "moderate pace". In its official statement, the Fed emphasized that the labor market has shown improvement and that the unemployment rate has declined, although it still remains elevated. Tightened fiscal policy is "restraining" economic growth, but to a lesser extent than in previous months. The Fed also pointed out that recovery in the housing sector has slowed in recent months. Overall, the Fed sees the downside risks for the economy and labor market as, "having become more nearly balanced." Moreover, it will continue to monitor economic developments. If there are further improvements in the labor market and if inflation continues to move towards it long-run objective, it, "will likely reduce the pace of asset purchase in measured steps at future meetings." However, the Fed reiterated that asset purchases are not on a "preset course" and its decisions remain contingent on sustained economic improvements.

Meanwhile, in order to support continued progress in the economy, the FOMC announced that the federal funds target rate would remain within the current range of between 0.00% and 0.25%. The Fed revised its forward guidance regarding this low target range. Specifically, it stated 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." This opens up the possibility for the funds rate to remain low even if the unemployment rate falls to 6.5%. In terms of price developments, monetary authorities explained that inflation is still, "running below the Committee's longer-run objective," while adding that long-term inflation expectations have remained stable. The Fed anticipates that inflation will, "move back toward its objective over the medium term."

FocusEconomics Consensus Forecast panelists expect the Fed to keep interest rates unchanged in 2014, with the federal funds rate averaging 0.19% in 2014.

Author:, Economist

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