The Federal Open Market Committee just finished what is very likely its last or next to last real decision-making meeting under Ben Bernanke. The long and short of the matter is that Tapering has arrived! Still, quantitative easing measures remain in place and the Fed will remain in a highly accommodative stance.
Tapering will be by $10 billion per month, starting in January. No change in interest rates have been seen when it comes to Fed Funds. The breakdown is that the $40 billion in monthly mortgage-securities buying will dip to $35 billion per month. Treasury purchases will drop to $40 billion from $45 billion per month.
This leaves the January 28 to 29 FOMC meeting as the last real meeting under then man many of call “Uncle Ben” or “Helicopter Ben.” Bernanke’s second term as the Chairman ends on January 31, 2014, but his term as a Board member ends January 31, 2020.
All of the talk has been around a tapering of the $85 billion per month of new bond buying purchases. We would warn readers who expect this to be a rapid end that tapering of quantitative easing has not been priced into the markets. We would also remind readers that a tapering is still simply just meaning “a little bit less of quantitative easing” rather than an end to quantitative easing.
Another issue is that the Federal Reserve’s balance sheet is now right at $4 trillion. Its reading from last week showed a balance of $3.991 trillion on the week ended December 11, but showed it as being $4.036 trillion on December 11. At some point, even the people running the show in Washington D.C. will have to realize that this is $4 trillion worth of funny money that has to be dealt with in some manner.
Statement on inflation: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”
Statement on the tapering: “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is 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. The Committee’s sizable and still-increasing holdings of longer-term securities 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.”
On interest rates ahead: “(The Fed) reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent 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.”