Fed To Keep Tapering; Final Reduction Expected This Fall

Citing that labor market conditions continue to improve and that inflation hasn't yet reached the 2% threshold, the Federal Reserve will continue to taper its bond-buying program by another $10 billion, the Federal Open Market Committee (FOMC) says in a release.

Beginning in August, the Fed will reduce its purchase of agency mortgage-backed securities to a pace of $10 billion per month rather than $15 billion per month, and will reduce its purchase of longer-term Treasury securities to a pace of $15 billion per month rather than $20 billion per month.

However, the FOMC cautioned that there remains significant underutilization of labor resources and that the recovery in the housing sector continues to move at a slow pace.Â

‘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,’ the FOMC's release says. Minutes from the committee's mpost recent meeting are expected to be published next week.

The federal funds rate will remain at the current 0 to 0.25% target range. Many analysts are predicting that, should the economy continue on the same path, the Fed will move to raise short-term interest rates by mid-2015.

The FOMC's minutes from May indicate that committee members were, at one point, debating having the final reduction come all at once, via a single $15 billion reduction, however that idea has apparently been scrapped. Regardless, at the current pace it is expected that the final reduction will come sometime this fall.

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