With Federal Reserve Chairman Ben Bernanke’s eight years in office drawing to a close, the central bank announced today it will ease up just a bit on the monetary-accelerator pedal because of improvements in the U.S. job market. Instead of buying $85 billion a month in Treasury bonds and mortgage-backed securities, the Fed will buy $75 billion a month. That’s still a lot considering that before the financial crisis monthly bond purchases were precisely zero.
The Fed’s goal is to push up the prices of long-term bonds and thus hold down long-term interest rates. That helps sustain housing and other rate-sensitive sectors. Even talk of a Fed taper caused 30-year fixed mortgages, as measured by Freddie Mac (FMCC), to rise to 4.42 percent this month from 3.35 percent in May. “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions,” the Federal Open Market Committee said in a statement, “the committee decided to modestly reduce the pace of its asset purchases.”
This probably isn’t the end. The rate-setting committee said it “will likely reduce the pace of asset purchases in further measured steps” if the labor market continues to heal and inflation creeps back up toward the Fed’s target of 2 percent.
The committee chaired by Bernanke was careful to say it’s still going full throttle on short-term rates, where it maintains a target of zero to 0.25 percent for the federal funds rate. It said it will probably keep rates in that zone “at least as long” as unemployment exceeds 6.5 percent, assuming the outlook for inflation goes no higher than 2.5 percent.
Unemployment has fallen much faster than was predicted when the Fed set 6.5 percent as its threshold; it fell to 7 percent in November. Today the Fed said it “likely will be appropriate” to keep rates close to zero “well past the time” unemployment goes below 6.5 percent, especially if projected inflation stays under 2 percent.
Dissenting from the dovish side was Boston Fed President Eric Rosengren, who said cutting bond purchases was “premature.”
In the first minutes after the Fed’s 2 p.m. announcement, U.S. stocks rallied, while Treasuries remained lower, and the dollar fluctuated, Bloomberg reported.
