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Home | Featured | Fed Continues Cut Back Despite Possible Slowdown
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Fed Continues Cut Back Despite Possible Slowdown

Officials at the Federal Reserve voted this week to continue cutting back its stimulative monthly asset purchases despite signs of a slowdown in economic growth to start the year.

Citing the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions” since the start of the current stimulus program in 2012, the Federal Open Market Committee decided at its March meeting to reduce purchases of agency mortgage-backed securities to a pace of $25 billion per month and to dial back purchases of long-term Treasury securities to a pace of $30 billion each month, starting in April.

The two cuts, made evenly, add up to another $10 billion reduction in monthly asset purchases.

The decision was made despite a noted stumble in growth during the winter months, which the committee said “in part [reflects] adverse weather conditions.”

Overall, the consensus opinion of the labor market was that indicators remained “mixed but on balance showed further improvement,” though the unemployment rate remains elevated. The unemployment rate ticked up to 6.7 percent in February despite a more promising showing in payrolls than in January and December.

With the unemployment rate hovering just above the 6.5 percent threshold originally set by the Fed as one of its markers for holding down interest rates, the committee also updated its forward guidance to shift its goal to one more subjective: “maximum employment.”

In a press conference following the release of the latest committee statement, Fed Chair Janet Yellen remarked that while the 6.5 percent mark “had a very useful impact in helping markets understand our expectations and shaping their own,” its use shrank as the economy approached that milestone so quickly.

“The committee has never felt that the unemployment rate is a sufficient statistic to the labor market. In assessing the real state of slack in the labor market ... it’s appropriate to look at many more things,” Yellen explained. “The closer we get as we narrow in on coming closer to the target we want to achieve, we will be carefully considering many indicators.”

Among those indicators, she says: the share of the labor force working part-time involuntarily, the number of discouraged and marginally attached workers, the long-term unemployment rate, and overall labor force participation. While some of those negative factors are seeing “exceptionally high” numbers, “the dial on virtually all of those things is moving in a direction of improvement,” she said.

The markets may take a little more convincing than that. In the minutes following the release of the FOMC statement, both the Dow Jones and NASDAQ saw declines—brought down even further by hints that the entire program could be finished as soon as October.

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