Fed to start slowing asset purchases

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Dec. 19, 2013 – The Federal Reserve in January will cut its monthly purchases of agency mortgage-backed securities and longer-term Treasury securities each by $5 billion a month, to $35 billion and $40 billion, respectively, the Federal Open Market Committee said Wednesday.

This modest reduction in asset purchases is being undertaken “[i]n light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions,” the committee said in its statement Wednesday following the close of a two-day policy setting session.

The Fed will continue to reinvest principal payments on its investments for now. It is meanwhile keeping its federal funds target rate at 0 to 0.25 percent, the committee announced.

NAFCU Chief Economist and Director of Research David Carrier said the FOMC offered new insight to its forward guidance on interest rates in this statement. It said the current fed funds target “will likely be appropriate ‘well past’ the time that the unemployment rate declines below 6.5 percent,” Carrier said, “especially if projected inflation continues to run below the longer-run goal of 2 percent.”

Carrier added, “The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance.”

He said the outlook on inflation may have factored into the change in forward guidance. “The FOMC will be monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

Related Links:
FOMC statement
NAFCU Macro Data Flash