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From Banking and Finance Law Daily, July 30, 2014

FOMC reduces pace of asset purchases; federal funds rate unchanged

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in June 2014, the Federal Open Market Committee has decided to slightly modify its monetary policy by making a further measured reduction in the pace of its asset purchasing. Beginning in August 2014, the FOMC will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month, rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month, rather than $20 billion per month. The target range for the federal funds rate remains unchanged.

Economic outlook. The FOMC reported that growth in economic activity “rebounded in the second quarter.” Labor market conditions have improved, “with the unemployment rate declining further.” At the same time, however, labor indicators generally suggest that “there remains significant underutilization of labor resources.” In addition, household spending appears to be “rising moderately” and business fixed investment “is advancing.” Meanwhile, recovery in the housing sector “remains slow.”

Asset purchases. The FOMC indicated that it will “make a further measured reduction” to the pace of its asset purchases in August 2014; the existing schedules for asset purchases remain in effect until that time. Also, the FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

The FOMC indicated that it will continue to monitor incoming information on economic and financial developments, and employ its policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In addition, the FOMC stated that purchases of agency mortgage-backed securities “will continue to be concentrated in newly-issued agency MBS in the… [to-be-announced] market, and purchases of longer-term Treasury securities will continue to be distributed using the existing set of sectors and approximate weights.”

Federal funds rate. While the FOMC maintained the current, low-target range for the federal funds rate at 0 to .25 percent, the FOMC stated that it “will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” According to the FOMC, this assessment “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

Still, the FOMC indicated that it anticipates maintaining the current target range for the federal funds rate “for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” Likewise, the FOMC anticipates that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

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