The Federal Reserve’s Open Market Committee released its latest policy statement today, which announced no change in policy, pushing off for some time the possibility of “tapering,” i.e., the Fed’s slowing quantitative-easing program. The Fed will continue to purchase $40 billion worth of government-agency mortgage-backed securities each month and $45 billion worth of government debt each month, but at the press conference following the statement release, Bernanke offered a sketch of how, assuming the Fed’s current economic projections (which have improved a bit) come true, the program will be tapered and then halted.
Ceteris paribus, the purchases will “moderate,” i.e., slow, ”late this year” (2013); QE3 will end when unemployment reaches 7 percent, which they project will happen “around mid ”; and then the Fed will begin to raise its interest rates from zero when unemployment hits 6.5 percent, which they expect around the beginning of 2015.
But Bernanke was doing his best to assuage concerns about tightening, arguing, for instance, that the metrics he pointed to were “thresholds,” not “triggers,” meaning it would still be up to the Fed to keep policy loose after they’d happened — the words “at least as long as,” referring to the commitment not to raise rates until unemployment hits 6.5 percent, he called especially “important.” He also tried to underscore that the not-too-distant slowing of asset purchases wasn’t akin to actual shrinking of the monetary base, saying a smaller QE3 would be akin to a car that’s still accelerating, but the gas pedal has been eased, it wouldn’t mean “applying the brakes” yet.
After Bernanke so strongly emphasized the future policy implied by the Fed’s economic projections, Jon Hilsenrath of the Wall Street Journal pointed out one problem with the above schedule: The Fed’s economic projections have been notoriously optimistic in recent years. But Bernanke was happy to point out that, if the Fed’s projections were wrong, that would just mean more easing. Alas, all of this argument didn’t seem to calm equities markets, which dropped, or keep bond yields down (they jumped a little).
You can read the policy statement and see all the specific changes here with the Wall Street Journal’s statement tracker.