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Federal Reserve Continues Taper; Reduces Purchases by $10 Billion

The Board of Governors of the Federal Reserve System issued their Federal Open Market Committee statement, commenting that growth in economic activity has picked up recently despite a sluggish first quarter, due in part to adverse weather conditions. The Fed noted that recovery in the housing sector remained slow.

Early analyst projections of the Fed's announcement expected a further reduction in bond purchases.

Michael Wolf, an economist at Wells Fargo Securities, offered this prediction to DS News: "We also expect another $10 billion reduction in bond purchases ($5 billion from Treasuries and $5 billion from MBS [mortgage-backed securities]) and for rates to be left unchanged."

He also noted, "We will be looking for any indications that the Fed's views on the labor market and inflation have changed to better gauge future policy decisions and the level of hawkishness/dovishness under the new chair. However, we do not expect there to be much deviation in language in this announcement."

Paul Diggle from Capital Economics agreed with Wolf.

"Sticking to its previous tapering plan, we expect the Fed to reduce its monthly asset purchases by a further $10 billion, to $45 billion per month. We still anticipate that the first rate hike will be in June 2015,” Diggle said.

Indeed, early projections for a continued taper of government purchases turned out to be accurate. Beginning in May, the committee will add only $20 billion in MBS per month, rather than the previous pace of $25 billion. Additionally, longer-term Treasury securities will be scaled back to $25 billion per month, rather than $30 billion.

"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 noted.

The committee reiterated its view "that a highly accommodative stance of monetary policy remains appropriate."

Overall, the announcement today means a continued taper of government purchases, while remaining flexible to emerging market conditions.

The Fed commented, "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."

The Fed's decision was unanimous.

About Author: Colin Robins

Colin Robins is the online editor for DSNews.com. He holds a Bachelor of Arts from Texas A&M University and a Master of Arts from the University of Texas, Dallas. Additionally, he contributes to the MReport, DS News' sister site.

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