United States: Fed continues with tapering plans as economy emerges from winter slump
April 30, 2014
At its policy meeting on 29-30 April, the Federal Open Market Committee (FOMC) announced that it would continue winding down its asset purchase program at the pace it first announced in December. The Fed explained that given the, “cumulative progress towards maximum employment and the improvement in the outlook for labor conditions,” it has decided to, “make a further measured reduction in the pace of its asset purchases.” Starting in May, the Fed will conduct purchases of USD 25 billion in long-term Treasury securities and USD 20 billion in mortgage-backed securities per month, down from USD 30 billion and USD 35 billion respectively. This cumulative USD 10 billion reduction equals that which was implemented after each of the previous three meetings. The Fed expects that maintaining a portion of the original purchase program will continue promoting economic recovery. If the winding down of asset purchases continues at the current pace, the program will end in December of this year.
According to the Fed, growth in economic activity picked back up in recent months after having been hampered by harsh weather during the winter. In terms of the labor market, the Fed pointed out that recent indicators were mixed but showed some improvement, although the unemployment rate remains elevated. Moreover, while business fixed investment has edged down and the housing market recovery has slowed, household spending appears to be on the upswing. The Fed considers there to be, “sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” and will continue to monitor economic developments. As in previous meetings, the Fed stated that 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 upon 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 maintained the new forward guidance regarding this low target range, which was introduced at the previous meeting. Specifically, future decisions to hike the rate no longer depend on a 6.5% unemployment threshold, but rather on the assessment of a, “wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” Moreover, the Fed indicated that it would likely be appropriate to maintain the current low target range for the federal funds rate for, “a considerable time after the purchase program ends.” The Fed currently anticipates that economic conditions will warrant keeping the rate at low levels, “even after employment and inflation are near mandate-consistent levels.”
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 recognized that inflation persistently below its 2.0% target could pose risks to economic growth and it is waiting for evidence that inflation will move back toward this objective over the medium term.
FocusEconomics Consensus Forecast panelists expect the Fed to keep interest rates unchanged in 2014. Next year, the panel sees the federal funds rate averaging 0.73%.
Author: Carl Kelly, Economist