MT Insider: US Economics - Tapering Off The Table For Now, Fed Reaffirms Highly Accommodative Stance

By Staff,

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In an unprecedented course of action, the Federal Reserve, under the helm of Chairman Ben Bernanke, is awaiting more evidence that progress will be sustained before adjusting the pace of the purchases.

Put simply, the Federal Reserve will not be tapering, which is a divergence from almost every economist on the street. The whispers were expecting a $15B taper (comprised of $10B in treasuries and $5B in mortgage back securities). As a result, equity markets rallied on the news, as monetary easing will continue.

It is important to note that asset purchases are not on a pre-set course and will remain contingent on the Fed's economic outlook. Per the release, "the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."

As it relates to the economy, the Fed believes that economic activity has been expanding at a moderate pace, but cites concerns regarding the unemployment rate, increasing mortgage rates and fiscal policy restraining growth.

However, "the committee expects that...economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate."

The Fed has reiterated its mandate regarding inflation and recognizes a rate below 2% "could pose risks to economic performance, but [the Committee] anticipates that inflation will move back toward its objective over the medium term."

Bottom line, the Committee has reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 0.25% percent, if unemployment rate remains above 6.5%, and inflation is lower than 2.5%.

Bernanke emphasized during the press conference that unemployment is not the only metric the committee is looking at (especially given declining participation rates), and there is no set calendar nor is the Fed tied to any specific data point.

Critically, the Committee will consider "additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments."

Separately, there was no commentary on Bernanke's plans for the future or on the search for his replacement (Janet Yellen currently considered the front runner by the media).

There was only one dissenter, Esther L. George, who continued to be concerned with the long-term impact from increasing inflation (although James Bullard voted in favor).

DJIA 15662.87 +133.93 +0.85

IXIC 3781.82 +36.12 +0.96

SPX 1724.06 +19.30 +1.13

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
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