On Wednesday, the Federal Reserve decided to start what has been informally dubbed as “tapering”, or the gradual reduction of its ongoing economic stimulus initiative.
On Wednesday, the Federal Reserve decided to start what has been informally dubbed as “tapering”, or the gradual reduction of its ongoing economic stimulus initiative. Currently being made to the tune of $85 billion per month, the Fed will cut back its bond purchases to $75 billion per month, starting in January 2014. The tapering will cover $5 billion decreases each in monthly mortgage-backed security and monthly Treasury purchases.
According to the Fed’s official statement, its Open Market Committee decided to start its modest tapering “in light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.”
Despite the imminent tapering, it still may be a while before the Fed ceases stimulus entirely. At the present, the initiative has become so overarching that it is projected to increase Fed assets to $4 trillion as of this week. Even with the tapering due to begin soon, the Fed remained steadfast on its commitment to keep short-term interest rates at an “exceptionally low” level, contingent on the unemployment rate moving below the 6.5 percent threshold, and/or the inflation rate increasing to 2.5 percent per year.
Speaking at a press conference following the Fed’s meeting, Chairman Ben S. Bernanke said that the Fed’s decision to taper is not tantamount to the central bank backing off on its commitment to economic support. “Nothing we did today was intended to reduce accommodation,” said Bernanke in defense of the taper. Majority of Fed officials expect interest rates to only go up in 2015, even as it is forecasted that inflation may still be below the 2.5 percent goal as of that time.
Talking about inflation, Bernanke told reporters that the Fed has “enhanced” its forward guidance pursuant to maintaining extremely low interest rates. “The committee is determined to avoid inflation that is too low, as well as inflation that is too high.” Following the Fed meeting, the stock market reacted by rallying, as the Dow gained about 200 points after news of the January taper became official.
The fallout of the announcement may not manifest itself much on consumers for the immediate foreseeable future, as interest rates may remain at historical low levels for some time. This means consumers could take advantage of competitive rates on home loans, auto loans or business loans, though these rates may not be at the record-low levels posted between late 2012 and spring 2013. “Taper talk,” as pundits call it, caused interest rates, particularly those for mortgages, to shoot up starting in May, but particularly in the summer months.
The move to taper stimulus was dissented by only one Fed official, the Boston Federal Reserve’s Eric S. Rosengren. Rosengren posited that unemployment rates were still too high and inflation rates too low to justify a tapering of stimulus. Otherwise, it was a near-unanimous decision, and one that may mark Bernanke’s last major decision as Fed chair before his term expires on January 31. This would leave the balance of the exit strategy in the hands of Bernanke’s purported replacement, Janet L. Yellen, who is expected to be confirmed as Bernanke’s replacement later this week.