Federal Reserve Outlines ‘Normalization’

The Federal Reserve’s Federal Open Market Committee broke Wednesday from its two-day economic policy meeting with no changes to interest rates or the pace at which it is decreasing securities holdings. But the Fed did give clearer indications than any time perhaps since it enacted stimulus measure more than three years ago about its plans to “normalize” its activity.

The Fed noted it would take a measured approach to eventually raising rates from historically low levels or detaching itself from Treasury securities purchases, saying none of its recent statements "imply that normalization will necessarily being soon.” The FOMC then stated it plans to raise the target for the federal funds rate, left at a range between 0% and 0.25% again by a majority vote, with the following actions in mind:
  • “When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
  • The Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
  • The Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate."

Addressing the amount of its agency mortgage-backed securities and longer-term Treasury securities holdings, the FOMC announced it will also continue the policy of lowering the amount of agency mortgage-backed securities (to $5 billion per month) and longer-term Treasury securities (to $10 billion) by $5 billion each, consistent with decisions made during several consecutive meetings dating back to former Chairman Ben Bernanke’s tenure. The bigger news was the announcement Wednesday that a reduction in securities holdings would occur “in a gradual and predictable manner," highlighting the following points:
  • "The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
  • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance."

Interesting, two FOMC members voted against Wednesday actions on rates and securities purchases, one because he believes the language used doesn’t reflect the considerable economic progress shown throughout the last year and another over concerns with continuing such accomodative rates well into 2015, as is being hinted.

- Brian Shappell, CBA, CICP, NACM staff writer

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