Federal Reserve’s decision – tapering

The Federal Reserve’s policy committee wrapped up its meeting today at 2PM, and the committee’s release was not a big surprise, since Federal Reserve president Ben Bernanke has mentioned Fed’s direction many times throughout the year. Actually, this meeting was the last meeting as Ben Bernanke being last as chairman of the Federal Reserve. Neither the Federal Reserve officials nor Ben Bernanke released new economic projections, but we can identify what Fed’s decisions are on the “hot topic” – quantitative easing and its tapering.

Even before Fed’s policy statement came out at 2 PM Eastern Time, numerous economic newspapers have been writing articles about its policy. Some people were concerned about it, as they knew that Federal reserve would taper its Quantitative Easing. According to the Wall Street Journal article What to Watch for From Fed Meeting, the hot decision is “tapering”.  Since Federal Reserve started to trim $10billion dollar of quantitative easing last December, Ben Bernanke strongly suggested that they are likely to make $10 billion cuts at each meeting, provided the economy improves and Fed expects. And the article also continued on speculating if there are any “wavering” of $10billion cut, if Federal Reserve outlook economy passively. Federal Reserve is also planning to keep short-term rates near zero, until the unemployment rate reaches 6.5%, and inflation rate does not rise to 2.5%.

As the article speculated, Federal Reserve indeed decided to taper, cutting $10 billion as it said earlier by holding of agency mortgage-backed securities at the pace of$30 billion instead of $35 billion and long term treasury bills of $35 instead of $40 according to Wall Street Journal article Parsing the Fed: How the Statement Changed . The interesting part of this article is that Federal Reserve has not changed much in the assessment of economy, as it kept its tapering as before.

The Federal Reserve kept its desired unemployment rate of 6.5% and inflation rate of 2%. For me, I think it is unlikely that the economy will manage to successfully accomplish these goals, as we can already observe major turmoil in financial markets. NASDAQ decreased by 1.14%, DJIA by 1.19%, and S&P 500 by 1.02%. I think people (especially investors) are still insecure about the current economy and Federal Reserve’s decision to cut quantitative easing. I think that the world economy will be affected by this as well. But, I think that tapering is unavoidable decision as we cannot depend so much on it “artificially” anymore. I hope the affect would not be severe- we still have a long way for recovery.

2 thoughts on “Federal Reserve’s decision – tapering

  1. jhchamot

    Very informative post. I disagree that the inflation and unemployment goals won’t be met, though. Of course I can’t say for sure that they will be, but I think the decline in the financial markets is just the immediate reaction to the decision – as is expected. This doesn’t necessarily mean the decline will be prolonged, or significant. Hopefully not.

  2. wyna

    Nicely put together FOMC release in short. I personally think that it is not a crazy assumption to think that unemployment rate and inflation goal will be met. Yes, the emerging markets have suffered even few weeks before the release and the US market was hit on the day of, but it is marginally done. I don’t think the long term will be any sort. The aggregate average expected growth for the emerging market is at 3.8%, which is by no means a small number and the US despite its slow recovery, we should be glad that it is not going the other way around. I presume that we should really watch for the rise in the interest rate which along with tapering could lead to some slowing down.

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