The Federal Reserve's FOMC Decides To Slightly Taper Its Bond-Buying Program - December 18, 2013
The Federal Reserve's widely anticipated decision on whether or not it will start to taper its highly popular bond-buying program at this time has been made, and the lead bank has opted to start the so-called tapering process, but barely.
Specifically, the lead bank has decided, beginning in January, to add to its holdings of agency mortgage-backed securities by $35 billion a month, down from $40 billion, and to add to its holdings of longer-dated Treasuries by $40 billion a month, rather than the $45 billion it had been buying monthly. In all, this modest tapering move will result in the Fed slowing down the total bond purchases from $85 billion a month to $75 billion. The vote to go ahead with this nominal deceleration was 9 to 1.
Behind this decision was the Fed's conclusion that since the last FOMC meeting economic activity was expanding at a moderate pace and that labor market conditions have shown further improvement. Moreover, the recoveries in housing, business fixed investment, and household spending were still in place, if unevenly. Today's issuance of upbeat data on homebuilding confirms the continuing strength of this core industry. Importantly, this improvement is taking place in a muted inflation setting, with price growth still below the Fed's long-range target of roughly 2% annually.
At the same time, the Fed also indicated that it would keep the federal funds interest-rate target near zero "well past the time that the unemployment rate declines below 6.5%." Currently, the nation's jobless rate, which has been weaving an irregular path lower, stands at 7.0%. At the trough of the recession, the jobless rate had been roughly 10%.
Finally, this was a token move, in our view, but it does at least start the process. Our sense is that the economy will, at some point, need to stand on its own without any additional FOMC support. At this time, however, the Fed is not about ready to take that step. In fact, our thinking is that we could go upwards of another year before the bond buying ceases altogether.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.