No Tapering From The Fed

benFollowing the close of the Federal Open Market Committee’s (FOMC) two- day September meeting in Washington D.C., the Federal Reserve released their press release statement today that shows the Fed will maintain their $85 billion quantitative easing bond buying program which has helped to drive interest rates lower and fuel the U.S. economic recovery.

In a dovish move that surprised the market and revealed that the majority of Fed members remain cautious and concerned about downside risks to the U.S. recovery to being moderating the pace of the Fed’s quantitative $85 billion quantitative easing program, the Fed Reserve statement today shows that more accommodative actions  are needed to support the U.S. economic recovery.

“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate” the Fed

Since the economic crisis erupted in 2008, the Fed has maintained its benchmark short-term interest rate near zero.

Based on today’s Fed statement the Fed’s benchmark won’t be changing any time soon until the unemployment rate lowers and inflation becomes “well-anchored” in the market.

“In particular,the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored” the Fed statement states.

Ever since Chairman Bernanke’s May 22nd comments indicating the rate of the Fed’s bond purchases could slow in the next few meetings and it became clear that some Fed members were willing to scale back the pace of the Fed’s bond buying  purchases as early as June, the yield on the 10 year Treasury has moved sharply higher.

On May 2nd the yield on the 10 yr. Treasury was just 1.63 percent and has skyrocketed since then over 115 basis points during the short span of only 4 months to 2.77 percent today.

Sharp increases in U.S. Treasury yields have caused ripple effects across the U.S. housing market with rates on a 30 yr. fixed soaring 1.2 percent since May and putting pressure on the still recovering housing recovery that provided much of the fuel for the U.S. economic recovery.

The Fed reported today that “removing policy accommodation” will take maximum employment and an inflation level of 2 percent.

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent” the Fed statement states.

 

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