Fed to Begin Tapering Asset Purchases

In its final meeting of 2013, the Federal Reserve’s Federal Open Market Committee (FOMC) voted to begin dialing back its asset purchase program in January.

Pointing to ongoing, stable improvements in economic activity and labor market conditions since the start of its latest quantitative easing program in September 2012, the committee agreed to scale back its purchases of agency mortgage-backed securities (MBS) to a pace of $35 billion per month; at the same time, purchases of Treasury securities will shrink to $40 billion per month. Together, the cuts represent an overall reduction of $10 billion in purchases each month.

The decision brings to an end months of speculation over when the Fed might finally decide to pump the brakes on its stimulative strategy. Now, the ongoing debate will likely turn to the expected timeline for further cutbacks—

probably with little input from the FOMC, which insisted that asset purchases “are not on a preset course.”

Nine committee members voted for the policy change, including Fed chair Ben Bernanke and Janet Yellen, his likely replacement. Voting against it was Boston Fed President Eric S. Rosengren, who said the shift is premature, given the elevated unemployment rate and an inflation rate “well below the target.”

Aside from the headline news, the committee’s release largely conveyed the same message as previous announcements. The pace of economic expansion was described as “moderate,” and it was noted once again that “[f]iscal policy is restraining growth,” though the FOMCacknowledged this time that the extent of restraint “may be diminishing.”

The committee also reaffirmed its plan to move forward with an accommodative stance of monetary policy as long as the unemployment rate remains above 6 1/2 percent, short-term inflation stays near the 2 percent goal, and long-term inflation expectations “continue to be well anchored.”

Early reactions to the news indicate the markets—while perhaps surprised—were prepared for an imminent taper. In the initial period following the announcement, the Dow Jones industrial average climbed more than 200 points, and shares of homebuilders D.R. Horton and Lennar gained several percentage points, likely due to a brighter outlook for economic growth next year, said Ruth Mantell, economics reporter for Marketwatch.com.

 

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