The Fed Tapers Again

The FOMC just released their latest policy statement. Actually, two statements. One is the regular policy statement; the other was a “statement on policy normalization principles and plans.” More on that in a bit.

The central bank said it will taper its bond purchases yet again. No surprise there. Starting in October, the Fed will buy $15 billion in bonds. This timeframe strongly suggests that they’ll be done with QE at the next meeting, which is in late October.

The Committee decided to keep the words “considerable time” to describe the period between the end of QE and the first rate hike. There had been some speculation that those words might be changed. Chairwoman Janet Yellen has previously said six months, which was probably a rookie error on her part.

They also kept the phrase, “there remains significant underutilization of labor resources” which seems quite dovish. Overall, it’s a pretty straightforward statement. They slightly changed their wording on inflation: “Inflation has been running below the Committee’s longer-run objective.” Last time, they said inflation had “moved somewhat closer to” their long-run objective.

Now let’s turn to the “Policy Normalization Principles and Plans.” This is what the Fed has to say:

The Committee will determine the timing and pace of policy normalization–meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve’s securities holdings–so as to promote its statutory mandate of maximum employment and price stability.

When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.

During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.

During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.

The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.

The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.

The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.

The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

Posted by on September 17th, 2014 at 2:16 pm


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