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Policy: Budgets & Deficits

Federal Reserve continues tapering, cuts bond purchases to $45 billion a month in expected move

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PennAve,Joseph Lawler,Economy,Federal Reserve,Budgets and Deficits,Monetary Policy,Taper,Bonds

The Federal Reserve announced no major changes to its monetary policy following the end of a two-day meeting on Wednesday, continuing its gradual slowing of its quantitative easing program and signaling confidence in its plans to return to normalcy despite hints of weakness in the U.S. economy.

For the fourth straight meeting, the central bank reduced the size of its monthly Treasury and mortgage-backed securities purchases by $10 billion, from $55 billion to $45 billion.

The Fed, in the second meeting of its monetary policy committee chaired by Janet Yellen, also mostly left unchanged its guidance about keeping short-term interest rates near zero.

Other details in the Fed's statement were mostly unchanged, except for one addition noting that economic activity picked up "recently" after slowing "sharply" throughout the winter.

It had been widely expected that Wednesday’s announcement would not contain any major new decisions from the meeting of Fed governors and regional bank presidents in Washington

The major action came last month, when, in her first meeting as Fed Chairwoman, Yellen changed the guidance for interest rates to untie it from a specific target. Since late 2012, the Ben Bernanke-led central bank had said that rates would remain near zero until unemployment fell below 6.5 percent. With the unemployment rate dropping to just 6.7 percent, Yellen and company updated the language to “to better reflect conditions as they now stand,” in her words.

Instead of setting a target, the Fed's guidance now simply says that it will base the timing of a rate hike on an assessment that will take into account “a wide range of information,” including measures of the labor market, inflation and financial conditions.

Although the Fed’s March statement explicitly said that the change in language didn’t reflect a shift in the Fed’s plans for its easing programs, markets disagreed. Expectations of rising rates, as reflected in bond prices, rose slightly following the meeting, before settling back down over the course of the next few weeks to fall in line with Fed members’ own projections.

There have been some indications in the meantime that growth and inflation might have slowed. On Wednesday the Bureau of Economic Analysis reported that first-quarter Gross Domestic Product growth fell to just 0.1 percent after checking in at 2.6 percent in the last quarter of 2013.

Core inflation, as measured by the consumer price index, ticked up to 1.7 percent in March, not far below the Fed’s 2 percent target. But it’s been below the target since early 2013. And another measure, the personal consumption expenditures index, shows core inflation significantly lower, at just 1.1 percent and flat in February. The Fed views core PCE inflation as the more accurate measure.

Although she said at the start of the year that she hoped the U.S. economy would grow at a 3 percent clip, Yellen, and other Fed officials, had been expecting the harsh winter weather to tamp down growth at least temporarily.

Of the weather, Yellen said in March that it played a role in weakening growth in the first quarter, but that "it’s likely in the view of most of the Committee to begin to wash out in the second quarter, and we can even see some rebound."

In a press conference in March, Yellen said that the tapering process would continue unless there is "enough change in the data we’re seeing about the economy that it no longer seems reasonable or convincing" to expect the labor market to continue improving and inflation to keep rising.

Wednesday’s release shows that the weather-influenced weakness in the early months of 2014 did not rise to those two criteria, and that the Fed’s plans are unaffected for now.

One unexpected development related to Wednesday's meeting was a notice posted on the Fed's website of an unplanned meeting among the four members of the Federal Reserve Board of Governors. That meeting was not open to the public, and the announcement said only that it concerned a "discussion of medium-term monetary policy issues." Why the members decided to hold a meeting is not clear.

No Fed members dissented from the statement. Last month, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota had dissented on the grounds that the statement weakened the Fed's credibility in raising inflation. On Wednesday, Kocherlakota voted with the group.

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