The Federal Reserve Board of Governors announced today that they would begin a taper of monthly bond purchases made as part of quantitative easing policy. The taper, or reduction, is slight—a decrease in monthly asset purchases from $85 billion to $75 billion, or a little more than 10 percent, which would begin in January.
While some analysts did not expect the Federal Reserve to taper any time in the near future, there were hints in Janet Yellen’s testimony before the Senate Banking Committee last month that the Fed was pleased with progress they perceived in the economic indicators they used to determine whether to scale back on asset purchases. Recent jobs numbers were probably one of the major indicators the Fed relied upon in their decision.
Markets reacted positively, and the Fed seems to have taken a particularly bullish turn on the economy at large. The announcement from the Federal Reserve Open Market Committee, chaired by Ben Bernanke, revealed that the Fed expects a growth outlook of over 3 percent for 2014, and unemployment possibly below 6 percent by 2015. A former Federal Reserve branch president was less optimistic, saying in a statement that he expected unemployment numbers, particularly the labor force participation rate, to “stay stuck at 1970s levels.”
As for interest rates, the Fed signaled that they intend to keep them at near zero for the foreseeable future. Unsurprising, given future chairwoman Janet Yellen’s philosophical predilection towards resolving unemployment issues, regardless of whether the numbers are showing slight improvement and regardless of whether some inflation results. Some market-watchers believed that this announcement was designed to soften the blow of reduction in quantitative easing, preventing stock indices from plummeting on the news. Still, the Fed should be sort-of congratulated for taking a baby step in weaning markets off of QE3.