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
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
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
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).
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