Fed Announces QE Taper to Begin in January, Funds Rate Guidance Modified
The Federal Reserve will begin to taper its asset purchase program in January.
- Purchases of long-term Treasury Bonds will be reduced from $45 billion per month to $40 billion.
- Purchases of mortgage-backed securities will be reduced from $40 billion per month to $35 billion.
- The near-zero fed funds rate will continue well past the unemployment rate threshold of 6.5 percent.
- The FOMC is concerned about the risk of persistently low inflation.
The Federal Open Market Committee voted today to take the first step in dialing down its historically accommodative monetary policy. In a generally optimistic announcement, the FOMC said they will begin to modestly reduce the pace of their asset purchase program beginning in January. Currently, the Fed is purchasing $45 billion worth of long-term Treasuries and $40 billion worth of mortgage-backed securities per month. That will be reduced in January to $40 billion for Treasuries and $35 billion for MBS. This move was largely priced into securities markets. The yield on 10-Year Treasury bonds increased from 2.83 this morning to near 2.90 percent after the announcement. The FOMC said that they will likely further reduce the pace of asset purchases over the course of 2014. However, the asset purchase program is not on a preset course. Given current expectations for moderately improved economic growth in 2014, it remains reasonable to expect that the Fed will reduce their asset purchases down to zero by the end of 2014, although the FOMC has not explicitly committed to that target.
In today’s policy announcement, the FOMC modified their forward guidance for the fed funds rate. They kept the unemployment rate threshold for the near-zero fed funds rate at 6.5 percent, but they noted that the fed funds rate would likely remain near zero well past the time that the unemployment crosses below 6.5 percent. The new economic projections issued by the Federal Reserve today show that the FOMC expects that the unemployment rate will cross through the 6.5 percent threshold in the fourth quarter of 2014. Moreover, Chairman Bernanke stated in his post-announcement press conference that the FOMC’s current consensus view is that the fed funds rate will be around 0.75 percent at the end of 2015 and 1.5 percent at the end of 2016. Thus, we retain our previous forecast for the first increase in the fed funds rate in the second half of 2015.
The FOMC recognized the downside risk from persistently low inflation. The year-over-year change in the headline consumer price index for November was 1.2 percent. The FOMC stated today that they will take a balanced approach in removing monetary policy accommodation consistent with its long-run goal of inflation near 2 percent.
The tone of the announcement was generally positive. The FOMC characterized the U.S. economy as expanding at a moderate pace. Labor market conditions were judged to be improving. The housing sector remains a concern. It was noted that the recovery in the housing sector slowed somewhat in recent months.
Market Reaction: U.S. equity prices climbed after the release of the FOMC policy announcement, reacting to the positive overall tone of the announcement. Treasury yields at the long end of yield curve increased through day. The yield on 10-year Treasury bonds reached 2.90 percent and then eased. WTI crude oil initially eased but has since moved up in price to $97.75 per barrel. The dollar strengthened on the Fed’s announcement against the euro and the yen.
For a PDF version of this Comerica Economic Alert click here: FOMC 121813.