Federal Reserve to Begin Tapering in January

The Federal Reserve finally answered the long-asked “when” question in regarding the beginning of the pull back on its asset buying-based stimulus efforts, announcing that a slight decrease in the pace of purchasing will begin early next year. NACM Economist Chris Kuehl, PhD predicted the move would “cause a ripple” in the business and investment worlds as the “money crutch” will start to vanish soon.

The Federal Open Market Committee (FOMC) broke Wednesday from its two-day fiscal policy meeting, the last of 2013, with the announcement that it would leave rates untouched at a range between 0% and 0.25% and would roll back the its assets purchase pace by about $5 billion per month. The decision was made with acknowledgement that the economy is now expanding at a moderate pace, longer-term inflation expectation have remained stable and risks to the positive economic outlook have become more balanced.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed posted in a statement on its website. “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.” It added that the FOMC would maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities as well as rolling over maturing Treasury securities at auction.

FOMC member Eric Rosengren fought the decrease on the grounds that the unemployment rate remained elevated and the inflation rate tracking below its target rendered a change in the purchase program “premature.”

Kuehl said the move to begin tapering early next year is “no shock.” The economist believes markets could read the action as the Fed signaling a deeper adjustment in its thinking sooner than later. However, Kuehl also noted that the somewhat surprise deeper concern about deflation than inflation now appears to exist could cause the Fed to “keep its foot on the gas” more than it wants to during the next few policy meetings in 2014.

“The expectation was that inflation would become more likely the more money was dumped in the economy, but that has not been the case,” he said. “The last thing the Fed wants to do is invite Japanese-style deflation into the equation.”

-Brian Shappell, CBA, CICP, NACM staff writer

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