Share

POLITICS: PennAve

Federal Reserve takes a step toward ushering out stimulus

By |
PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Janet Yellen,Quantitative Easing,Interest Rates

The Federal Reserve moved closer to ushering out its massive quantitative easing program Wednesday, announcing that it would reduce its monthly stimulus by $10 billion.

With Wednesday’s decision, which was widely expected, the size of the central bank’s monthly purchases of Treasuries and mortgage-backed securities have been reduced from $85 billion in December to $35 billion.

Ending a two-day meeting in Washington, members of the Fed’s monetary policy committee also hinted at plans for a slightly earlier increase in interest rates. The Fed has held near zero since the financial crisis in 2008. In projections released alongside of the monetary policy announcement, the median long-run forecast for short-term interest rates declined from 4 percent in March to 3.75 percent in June.

Otherwise, however, the Fed’s message was almost unchanged since its last meeting, even though it also cut its forecast for economic growth because of the reported contraction in gross domestic product in the first quarter of the year.

It was the second meeting run by Chairwoman Janet Yellen, who is trying to oversee a transition away from the Fed's emergency efforts initiated by her predecessor Ben Bernanke to more normal monetary policy without undermining the slow, fragile recovery.

Wednesday’s statement, unanimously approved by members of the committee, said that growth has “rebounded in recent months,” a clear indication that the Fed views the contraction in the first quarter as an anomaly, attributable in part to the unusually harsh winter weather.

Although the first quarter decline caused the Fed to lower its forecast for the year, it’s clear that officials are again expecting a pick-up in growth the rest of the year. Their new projections show unemployment falling faster than previously anticipated, from 6.3 percent now to 6.0 or 6.1 percent by the end of the year and to roughly 5.5 percent next year — near the rate the Fed views as consistent with full employment.

Fed officials have repeatedly cautioned that both the bond-buying program and its forward guidance regarding interest rates are conditional on incoming economic data.

If the Fed's newest projections play out, however, the Fed’s asset purchases would be fully phased out this fall, with the Fed's balance sheet growing to roughly $4.4 trillion, up from under $1 trillion before the crisis.

View article comments Leave a comment

More from washingtonexaminer.com