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FOMC Announces Plan to Reduce Bond Purchase Program; Cites Improvement in Labor Markets
Thursday, December 19, 2013 6:55 AM

The Federal Reserve said it will begin to reduce the pace of its bond purchase program by $10 billion to $75 billion per month, signaling an attempt to lessen the need for central bank stimulus to sustain economic growth.

Included in their comments:

“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. If incoming information broadly supports the committee’s expectation of ongoing improvement in labor-market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps.”

It “will likely be appropriate to maintain the current target range for federal funds well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Fed Boston President Rosengren was the lone dissenter noting that changes on the bond purchasing program were “premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.”

“So far, economic growth has lagged significantly behind previous recoveries,” notes Brian Turner, director and chief strategist with Catalyst Strategic Solutions.

Since the recession officially ended in December 2009, Turner points out that the economy has expanded at a +2.3 percent annualized pace. That compares with an average of +3.2 percent over the same period following the 1991 and 2001 recessions and 5 percent following the 1982 recession.

“Many expect growth to strengthen to +2.6 percent in 2014 from this year’s modest +1.7 percent,” says Turner.

Treasury rates rose soon after the announcement the benchmark 2- and 10-year bond rates increased to 0.32 percent and 2.87 percent, respectively.