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Fed cuts stimulus some more

By Mark Hamrick · Bankrate.com
Wednesday, January 29, 2014
Posted: 2 pm ET

Seeing continued expansion of the U.S. economy, the Federal Reserve has scaled back its monthly asset purchases by another $10 billion, to $65 billion.

In its policy statement, the Fed acknowledged further healing in the job market, despite the December employment report showing that 74,000 jobs were created, fewer than forecast. At the same time, the unemployment rate dropped to 6.7 percent.

The central bank's policy committee said it "continues to see the improvement in economic activity and labor market conditions ... as consistent with growing underlying strength in the broader economy." With that justification, it will reduce its purchases of mortgage bonds and Treasury notes by another $10 billion a month, starting in February.

Key rate remains near zero percent

The Fed reiterated its promise that the benchmark federal funds rate will be kept near zero percent "well past the time that the unemployment rate declines below 6.5 percent." While looking to foster further improvement in the job market, the Fed also is concerned that inflation is too low.

The announcement followed two days of policy meetings, the last in which Ben Bernanke served as chairman of the Federal Reserve. Janet Yellen succeeds Bernanke later this week, having previously served as vice chairman.

Steadily cutting bond purchases

Bernanke had announced in December that asset purchases would be reduced for the first time beginning this month. At his news conference, Bernanke said he expected there would be further reductions in measured or virtually equal steps as the year proceeds. He also cautioned that changes in policy would be "data-dependent," meaning that if conditions changed, the Fed would be ready to adjust as needed.

Whole lotta rosy

In its economic projections, the Fed has said that the nation's unemployment rate could go as low as 6.3 percent later this year. But Lindsey Piegza, chief economist with Sterne Agee, says the Fed "consistently has a rosier forecast than what the data actually shows." She says the risk remains that the economy will underperform this year, noting that many newly created jobs pay relatively low wages, dampening consumer spending.

Thursday morning, the Commerce Department is scheduled to release its first estimate of growth for the fourth quarter of 2013. Economists expect it to reflect an annual growth rate of around 3 percent, following a 4.1 percent annual growth rate in gross domestic product in the previous three months.

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The Fed continues to lower the dosage

Ben Bernanke's last meeting as Federal Reserve chief has few surprises except for the harmony among policymakers.


Trying not to rattle investors

One of the Fed's many challenges is the desire to reverse the extraordinary steps taken in response to the Great Recession, including an eventual increase in interest rates, without disrupting financial markets. Most members of the Federal Open Market Committee have said they believe the first such increase in the federal funds rate will come sometime in 2015.

Assessing Bernanke's performance

On Bernanke's job steering the Fed, Piegza says, "It's difficult to give him a grade below an A-minus." She credits his steady hand for helping to steer the economy out of the 2007-2008 financial crisis. "We have to applaud his reaction and his willingness to look outside the normal toolbox in terms of navigating the U.S. economy effectively out of these very dire times," Piegza says.

The next FOMC meeting is scheduled for March 18-19. Yellen is to hold her first news conference as chairwoman following the March meeting.

For the first time in at least a year, no committee members dissented from the policy statement. Last year, FOMC member Esther L. George dissented in seven of the eight meetings, on the grounds that the Fed's easy-money policy threatened to increase inflation. In December, Eric S. Rosengren dissented for the opposite reason, saying that the Fed was reducing its asset purchases too early, threatening the recovery.

John Canally, chief economist with LPL Financial, notes that it's been a long time since a Fed statement didn't have a dissent. The decision to continue reducing asset purchases is enough to enlist support from everyone on the committee, he says. Canally says the committee faced a "high hurdle" to knock the central bank off the path of reduced asset purchases, established in December.

So now you know what happened, but what did the Fed say in plain English?

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