New Federal Reserve head lives up to promise of continuity, whittles monthly assets purchase to billion and keeps interest rates untouched, reports
Washington, March 20: The US Federal Reserve didn’t disappoint, neither did Janet Yellen in her first meeting as the Chair of its marketing committee on Wednesday as she chose to stick to the path trod by predecessor Ben Bernanke and reduced stimulus by another billion despite the continuing sluggishness in the economy.
The much anticipated move is the third reduction to quantitative easing, and whittles the Federal Reserve’s monthly bond purchases to billion; in the latest cut, the mortgage bond purchases will be reduced by billion to billion a month while treasury purchases will be slashed another billion to billion a month.
Wednesday’s policy move followed a December 18 decision to whittle down monthly asset purchase, a monetary ploy predecessor Bernanke resorted to late 2008 to stimulate the economy post-meltdown, and which Yellen defended across platforms in the run-up to her succession in January.
In recent times, the first cut was in December 2013 when FOMC cut monthly asset purchases by billion noting that the economy was moderately expanding. It was next reduced by another billion to billion at Bernanke’s last meeting as Federal Reserve Chairman this January, when the FOMC hinted at further tapering of quantitative easing or stimulus.
“Starting next month we will be purchasing billion of securities per month, down billion per month from our current rate,” Yellen announced at her maiden news conference after the FOMC meeting even while keeping the interest rates untouched at historically low levels.
The new Chair, who blamed the cold weather “in part” for the ongoing sluggishness, also hinted that interest rates would be raised not before autumn.
“We have expressed a number of opinions about the likely path of rates. In particular, the committee has endorsed the view that it anticipates it will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates,” she said in a statement later.
Greg McBride, chief financial analyst at consumer finance company Bankrate, told US News and World Report magazine that if interest rates remained near zero in 2014, it would imply this would be a good year for consumers to square off debts such as home loans, credit card dues and student loans.
“A Janet Yellen Fed is not going to be a in a hurry to raise interest rates prematurely,” McBride said.
Full Statement
Following is the full text of the statement released by FOMC following a two-day meeting on interest rate policy:
“Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions.
“Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow.
“Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.
“The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.
“Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of billion per month rather than billion per month, and will add to its holdings of longer-term Treasury securities at a pace of billion per month rather than billion per month.
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
“The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
“The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.
“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.
“However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
“The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
“With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.”