Fed May Scale Down Bond Buying if Economy Continues Its Recovery

Written by: John Landers

If the economy continues manufacture good news, according to Federal Reserve Chairman Ben S. Bernanke statement, the Federal Open Market Committee (FMOC) will reduce its economic stimulus program later this year. The program could come to an end by the end of the second quarter in 2014. Currently, the Fed purchases about $85 billion a month– $40 billion a month in mortgage bonds and $45 billion in long-term Treasuries.

Bernanke’s statement left no doubt about the FMOC’s intentions over the coming months. He cautioned that the plans could be changed if the economy slows down or accelerates. The chairman also said that he anticipates the unemployment rate to be around 7 percent when if the program comes to a halt around Q2 of next year.

This would be about help a percentage point higher than the initial benchmark of 6.5 percent. Bernanke said, “Our policy is in no way predetermined and will depend on the incoming data and the outlook.”

Market reactions to Fed’s statement

Equities fell about 1 percent upon the Feds remarks. Investors expect a tightening of monetary policy and the end of years of “easy money.” On news that the Fed may be scaling back its bond buying, yields on Treasury bond increased.

The statement reveals the FMOC has a bit of optimism about the economic recovery and that future data will be favorable. This confidence was echoed in the following line: “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

Other insights from the meeting

Bernanke said that the economy remain stable—the same condition as after its last meeting. The Fed acknowledges the roles of the housing market and consumer spending in driving the economic recovery. Bernanke comments on the improved job market but notes the elevated state of unemployment.

A hic-cup in the recovery will cause the Fed to delay any cuts in the program and may even result in an increase in spending. The attitude can still be describes as “wait-and-see.”

Fed projections

The FMOC updated their March projections for economic growth, lowering their expectations to a growth rate of 2.3 percent for the year—down from 2.6 percent. The growth rate estimate for 2014 was raised from 3 percent to 3.5 percent. The bankers anticipate a more rapid decrease in the unemployment rate over the coming months. The benchmark rate for employment remains at 6.5 percent. The limit for an acceptable inflation rate is 2 percent. The Fed project shows that it could reach its target rate for unemployment early next year.

If the Fed does decide to hike interest rates, many Fed officials believe it won’t take place until 2015. The number of Fed officials who thinks that rates should be increased, declined from four to three.

 


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