Fed's Modest 1st Taper Includes Pledge of Short-Term Low Rates

Fed's Modest 1st Taper Includes Pledge of Short-Term Low Rates
Federal Reserve Chairman Ben Bernanke at Wednesday’s news conference.

Federal Reserve officials Wednesday pledged to keep short-term interest rates low as it announced the first “taper” — or pullback — of its central stimulus strategy of bond purchases.
The move to reduce the Fed’s $85 billion in monthly bond purchases by $10 billion starting in January was initiated mostly because of the improving jobs market, the Fed said in a statement after a two-day policymaking meeting.
The jobless rate fell to 7 percent in November, a five-year low. Employers added a better-than-forecast 203,000 workers to payrolls. Unemployment was down from 10 percent in October 2009, during the recession, and up from 4.4 percent in May 2007.
The Fed said it would decrease its purchases of mortgage-backed securities to $35 billion a month, from $40 billion, and reduce its purchases of Treasury securities to $40 billion, from $45 billion.
Meanwhile, the Fed assured financial markets it would keep its short-term interest rate at near zero, where it has been since December 2008. It will stay there  until “well past the time” that the unemployment rate drops below 6.5 percent.
According to the Fed’s most recent forecast, the unemployment rate would drop to no lower than 6.3 percent by the end of 2014, and may not be well below the target level until 2015.
However, mortgage rates have been increasing in anticipation of the first tapering.
Mortgage bankers said today that the average contract interest rate for 30-year fixed-rate loans, with conforming loan balances ($417,000 or less), increased last week to 4.62 percent, the highest level since September 2013, from 4.61 percent the previous week.
The bond-purchasing stimulus program began in September 2012 and has helped swell the Fed’s balance sheet to about $4 trillion.
“The steps that we take will be data dependent,” Bernanke said in a news conference. “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases.
If the economy slows, the central bank could “skip a meeting or two,” and if the economy picks up speed, it could taper a “bit faster,” Bernanke said.
Janet Yellen, the Fed’s current vice chairman and President Barack Obama’s nominee to succeed Bernanke, voted in favor of the policy action today.

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