According to a statement provided by the Federal Open Market Committee of the Federal Reserve, the committee has approved another reduction of the Fed’s monthly asset purchases.
The adjustment will be made in February and cuts monthly purchases of mortgage backed securities from $35 billion to $30 billion and monthly purchases of Treasury securities from $40 billion to $35 billion.
FOMC began reducing its asset purchase under its quantitative easing program in January, when the monthly purchases of mortgage-backed securities and Treasury securities was reduced from $85 billion per month to $75 billion.
Citing its goals of maximum employment and price stability, the FOMC said that it has seen consistent improvement in the economy and specifically mentioned a lower, but still elevated unemployment rate. The statement also indicated that the FOMC expected labor markets to improve.
FOMC Asset Purchases: How They Impact Mortgage Rates
The Fed initiated the QE program in an effort to control rising long-term interest rates, which include mortgage rates. Yesterday, the FOMC statement said that Fed expects its purchases of longer-term assets will continue to control long-term interest rates and mortgage rates while supporting mortgage markets.
FOMC’s statement reported that it sees the risks to its economic outlook and the labor market as having become nearly balanced. The FOMC is still looking for inflation to reach its 2.00 percent goal.
Fed Monetary Policy To Remain “Highly Accommodative”
The Fed intends to maintain a highly accommodative stance on monetary policy after the QE asset purchases end and the economy is significantly stronger. The current Federal Funds Rate of between 0.00 and 0.250 percent will be maintained at least until the national unemployment rate drops below 6.50 percent.
FOMC members reaffirmed their commitment to monitoring economic indicators as part of any decision to alter current QE measures or the Federal Funds Rate.
Indicators Mentioned In The FOMC Statement Include:
- Additional indicators of labor market conditions
- Inflationary pressures and expectations
- Readings on financial developments
FOMC statements have consistently included the committee’s assertion that no arbitrary benchmark alone will be sufficient for the committee to change either QE asset purchases or the Federal Funds Rate.
FOMC stated that it will seek a “balanced approach consistent with its longer-run goals of maximum employment and inflation at two percent.”
Although fears of tapering the Fed’s monthly asset purchases may persist, it appears that each FOMC decision to reduce asset purchases under the QE program indicates economic growth.
Last week brought mixed news; while the Department of Commerce reported a dip in new home sales, mortgage rates also fell. The Federal Reserve’s FOMC statement revealed that quantitative easing would be further reduced by an additional $10 billion monthly.
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