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From Banking and Finance Law Daily, October 29, 2014

FOMC winds down asset purchases; federal funds rate unchanged

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in September 2014, the Federal Open Market Committee has decided to conclude its asset purchase program in October. Meanwhile, the target range for the federal funds rate remains unchanged.

Economic outlook. The FOMC reported that economic activity is “expanding at a moderate pace.” Labor market conditions have “improved somewhat further, with solid job gains and a lower unemployment rate.” Moreover, labor market indicators generally suggest that underutilization of labor resources is “gradually diminishing.” In addition, household spending “is rising moderately” and business fixed investment “is advancing.” Meanwhile, recovery in the housing sector “remains slow.”

The FOMC further observed that inflation “has continued to run below the Committee's longer-run objective” and that while “market-based measures of inflation compensation have declined somewhat,” survey-based measures of longer-term inflation expectations “have remained stable.” Accordingly, while the FOMC indicates that inflation in the near term will “likely be held down by lower energy prices and other factors,” the Committee states that “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.”

Asset purchases. The FOMC indicated that, in its judgment, “there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program.” Similarly, the Committee continues to see “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.”

Consequently, the FOMC has decided to “conclude the current asset purchase program by the end of October.” At the same time, the Committee plans on “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.” In the FOMC’s view, by keeping the Committee's holdings of longer-term securities at sizable levels, the policy “should help maintain accommodative financial conditions.”

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.”

The FOMC also indicated that it anticipates maintaining the current target range for the federal funds rate “for a considerable time following the end of its asset purchase program this month, 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.” At the same time however, the FOMC emphasized that if there is “faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

Still, 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.”

Chairman Hensarling’s comments. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) indicated that the central bank’s ending its stimulus spending, known as “quantitative easing” (QE), was “good news.”

In his Oct. 29, 2014, release, Hensarling stated, “While many believe monetary accommodation was necessary in 2008 and 2009, the Federal Reserve allowed its extraordinary measures of the financial crisis to become its ordinary policy. In both time and money, QE has overstayed its welcome by years and by trillions.”

According to Hensarling, “Loose monetary policy before the crisis inflated the housing bubble and six years of QE may have just inflated the next bubble. More sustainable market-driven interest rates, an orderly unwinding of the Fed’s inflated balance sheet and a more predictable, rules-based monetary policy will help foster long term economy growth.” Even with the desired monetary policy, Hensarling asserted that other roadblocks to U.S. growth and prosperity remain, including “our complex and unfair tax code.”

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