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The Resource for the Global Finance Profession

Tapering Begins: Fed Announces ‘Modest’ QE Reduction

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 2013-12-18

The Federal Reserve’s Federal Open Markets Committee (FOMC) announced plans Wednesday to modify its pace of monthly asset purchases from a monthly rate of $85 million to $75 million. The $10 billion reduction to the Fed’s current portfolio will begin in January and be split evenly between Treasury purchases and mortgage-backed securities.

“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,” the Fed stated in an official release.  

Future decisions on asset-purchases, the Fed said, would be based on how well economic outlook data supports FOMC expectations of “ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.”

The pacing-back of the Fed’s asset-purchasing program comes, to some extent, unexpectedly to many Fed watchers. The just-released 2014 AFP Business Outlook Survey found a majority of corporate treasurers and financial executives anticipated a tapering of the Fed asset-purchases during either the second or third quarter of 2014, and 17 percent of surveyed didn’t expect an FOMC announcement until 2015.

In his press conference, Bernanke stated that incoming Fed chair Janet Yellen was closely advised on and “fully supports” the decision. He further remarked that the reduction decision was not meant to precipitate a tightening of policy, whereas enhanced forward guidance should offset implications.

The Fed also addressed its current zero-bound interest rate policy, confirming that FOMC intends to keep short-term interest rates low “well past the time” that unemployment drops below 6.5 percent, particularly with inflation running below target.

Since the Fed lowered short-term rates to near zero in 2008, financial professionals have taken full advantage of the opportunity—particularly under forecasts suggesting an eventual rise, according to AFP’s Business Outlook Survey.  Fifty-five percent surveyed indicated that their organizations took at least one major action within the last year to benefit from the low-rate environment—with issuance and refinancing of long-term debt the most likely actions taken.

With the direction of interest rates a present chief focus of financial professionals, the Fed’s open-market modification plans and reaffirmation of continued low interest rates could welcome more certainty for future business decisions.

Download the 2014 AFP Business Outlook Survey here.

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