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Fed to begin tapering

By Mark Hamrick · Bankrate.com
Wednesday, December 18, 2013
Posted: 2 pm ET

Updated at 4 p.m.: In a sign that Federal Reserve's policymakers believe the economy is healing, they've decided asset purchases should be reduced slightly beginning in January. At his final news conference of the year, Chairman Ben Bernanke said "the economy is continuing to make progress. The combination of low interest rates and monthly bond purchases," he said, has led to "meaningful, cumulative progress" in healing the job market.

Even as the Fed pledged to cut monthly asset purchases by $10 billion to $75 billion beginning in January, it pledged that low interest rates will be called for "well past the time that the unemployment rate declines below 6.5 percent." The Labor Department reported that the jobless rate in November declined to 7 percent. Bernanke said "long-term unemployment is still a major concern."
Ben Bernanke
Bernanke said the Fed's asset sheet will still be "expanding at a rapid pace." He acknowledged that reversing the extraordinary measures taken in response to the financial crisis will be challenging. He said that further measured reductions in asset purchases will probably be announced at future Fed meetings. But as in the past, he said those decisions will be "data-dependent." Even as he spoke, investors seemed to take the so-called tapering move in stride, with the Dow Jones industrial average staging a triple-digit advance.

Bernanke was asked whether the forthcoming change in leadership, with Janet Yellen expected to succeed him early in 2014, forced an early reduction in asset purchases. He simply said, "No," before adding that Yellen was fully supportive of the FOMC statement.

Characteristically low-key when describing his own plans and his legacy, Bernanke pointed to increased communication and transparency under his watch as chairman, which began in 2006. He began holding the Fed's first post-meeting news conferences in 2011. In response to a question, Bernanke also accepted some blame for failing to see warning signs leading to the financial crisis. "I was slow to recognize the crisis. Whether or not we could have done more or prevent it, that's a separate question."

Bernanke was asked whether he might return to his native South Carolina. But Bernanke gave no indication of his longer-term plans, only saying only that he and his wife plan to continue to reside in Washington "for a bit of time." Bernanke is to preside over one more policy-setting session, which is at the end of January.

Bankrate Audio

Mark

Hamrick

Washington Bureau Chief, Bankrate.com

Greg

McBride

CFA, senior financial analyst, Bankrate.com

FED UPDATE: Taper begins under Bernanke

The Federal Reserve remains concerned about high unemployment and low inflation as it sets to scale back asset purchases.

LISTEN TO AUDIO


Published at 2 p.m.: The Federal Reserve is keeping interest rates at record-low levels while pressing ahead with bond purchases, albeit at a slower rate.

Acknowledging recent improvement in the job market, the Fed is cutting monthly asset purchases from $85 billion to $75 billion.

Fed concerns:

  • Interest rates are to remain at record-low levels, but for how long?
  • Asset purchases are needed to continue helping the economy.
  • Unemployment, while down from the worst of the recession, is still too high.
  • Inflation is so low that it suggests the economy is still in need of help.

As it completed the last scheduled policy-setting meeting of 2013, the Federal Open Market Committee, or FOMC, had reasons for optimism. The prospect of an economically damaging government shutdown has been removed with the recent budget deal in Congress. Also, the job market appears to be on the mend. The unemployment rate fell to 7 percent in November. The Fed is backing away from its previously stated unemployment rate threshold of 6.5 percent. It now says "that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."

The FOMC's key dual monetary policy decisions have changed slightly. They include ongoing "quantitative easing" or monthly purchases of $40 billion of Treasury securities and $35 billion of mortgage-backed securities beginning in January. That's a $10 billion cut per month in bond purchases. It is maintaining the federal funds rate at between zero and 0.25 percent.

There was one dissenting member of the FOMC -- Eric Rosengren, president of the Federal Reserve Bank of Boston. He said "with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature."

Transitions at the Fed

An eventual transition in policy is just one of the changes in the offing. Chairman Ben Bernanke presides over his final meeting of the year in January. Janet Yellen, currently vice chair, is expected to become chief of the central bank, pending confirmation by the full Senate.

Economist Joel Naroff says the Fed is anxious to begin reversing the extraordinary measures taken in response to the financial crisis. "You need to get back to normal monetary policy, and you can't do that until the economy is in good shape. So, when you start the process, you are signaling the economy is getting back to stronger growth." Naroff says Fed officials are worried about cutting back too soon and risking another slowdown. He says the Fed "doesn't have a lot of tools to deal with that" with benchmark rates as low as they can go.

Inflation worries

Inflation, another key issue watched closely by Federal Reserve, has been remarkably low. The FOMC said in its statement that it "recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance."

While consumers like low prices, unusually low inflation is a worry for central bankers. "They are concerned that it could evolve into deflation. In Japan, when deflation occurred, people essentially stopped buying," says Sung Won Sohn, Smith Professor of Economics at California State University Channel Islands.

Sohn says when consumers see falling prices, they ask "'Why buy now?' They wait and that becomes a vicious cycle." By adjusting policy to avoid a potentially damaging downward spiral in prices, the Fed hopes to keep the economy on a solid path. "We want consumers and businesses to spend more, not less," says Sohn.

Follow me on Twitter: @hamrickisms.

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