The Fed surprised most analysts by deciding to announce the start of tapering. The tapering will take effect in January when the Fed reduces its bond buying from $85 billion to $75 billion. That’s just the early start of a long tightening process that will eventually lead to higher deposit rates. However, the Fed also added language to the statement saying that it intends to keep rates low for an even longer time after the unemployment rate threshold is reached. So the long wait continues for savers.
Below is the excerpt from the FOMC statement which describes the tapering:
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. 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.
Below is the excerpt describing the FOMC’s plans to keep rates low for an even longer time:
The Committee now anticipates, based on its assessment of these factors, 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.
One interesting change from the previous FOMC meetings this year is a change of who voted against the policy action. The "no" vote came not from the inflation hawk, Esther L. George, but from the inflation dove, Eric S. Rosengren, who wanted to delay the start of tapering.
In addition to the statement, the FOMC released its economic projections and Chairman Bernanke gave his last press conference as Fed Chair. One thing to note about the projections is that the year when the FOMC participants anticipate a rate hike was moved out a bit. In September, two participants anticipated a rate hike in 2016. That’s now up to three.
Future FOMC Meetings
The next two FOMC meetings are scheduled for January 28-19 and for March 18-19. The March meeting will include the summary of economic projections and a press conference by the Chairperson who will likely be Janet Yellen.