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Fed: Taper Continues; Adjust Economic Projections

The Federal Open Market Committee (FOMC) concluded its June meeting with the announcement that members have once again voted to bring down the Federal Reserve's stimulative monthly asset purchases.

Taking a cue from improvements in labor market indicators, household spending, and general economic activity, the committee members voted to reduce the Fed's monthly purchase of agency mortgage-backed securities (MBS) to a pace of $15 billion per month, while purchases of longer-term Treasury securities will be cut to $20 billion per month.

Together, the cuts represent a scaling back of $10 billion in monthly additions, keeping with the committee's pace so far. If the current course continues, the so-called "taper" could conclude by fall.

However, as usual, the FOMC made a point that "asset purchases are not on a preset course, and ... 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."

Despite seeing overall improvement in the economy, board members did readjust their economic projections in light of recent news of a downturn in the first quarter.

For 2014, the committee now projects a 2.1–2.3 percent change in real gross domestic product (GDP), a sharp drop from March's projection of 2.8–3.0 percent growth.

On the other hand, labor forecasts were more favorable. By the end of the year, the committee—perhaps encouraged by recently improved jobs numbers—expects the unemployment rate to be as low as 6.0 percent.

In a press conference following the release of the committee's statement, Fed Chair Janet Yellen explained the revision comes as a result of better than expected payrolls, which have averaged 234,000 over the last three months.

Yellen also addressed the role that the regulatory environment has played in this year's slowdown in the housing market, admitting that banks have grown increasingly reluctant to lend to borrowers with lower credit scores.

"They mention in meetings with us consistently their concerns about putback risk, and I think it is difficult for any homeowner who doesn't have pristine credit these days to get a mortgage," she said, adding that regulators now need to work to clarify mortgage lending rules "to create an environment of greater certainty for lenders to be willing to extend mortgage credit."

Markets responded largely positive to the announcement and to Yellen's conference. As of 2:30 Central, the S&P 500 was up 0.6 percent for the day and was on pace for a record closing.


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