The Federal Open Market Committee announced Wednesday that it would start reining in its QE program by instituting a “modest” $10 billion reduction in its monthly bond-buying program to $75 billion per month.
Beginning in January, the FOMC said, it will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month, which would slow down its stimulus program called quantative easing.
At his last press conference before he steps down as Federal Reserve Board Chairman, Ben Bernanke said Wednesday that further tapering will “be data dependent.” However, he said he anticipated that the Fed would “probably do a measured reduction” at each meeting.
“If the economy slows or we are disappointed we could skip a meeting or two, but if things pick up we could go a bit faster,” he said. “I anticipate similar moderate steps through most of 2014.”
Like other economists, Jim O’Sullivan, Chief U.S. Economist at High Freqency Economics, had said that while he thought tapering “was quite possible today,” HFE thought the Fed “would hold off for one more meeting.” Markets appear to be taking the news in stride, O’Sullivan said, ”with bond yields little changed and equities rallying by close to 1%.”
Consistent with the message on tapering, O’Sullivan said that “the tone on growth was reasonably positive.”
Bernanke said at the press conference that “We think inflation will gradually move back to 2%.” However, inflation might rise due to health care costs, he noted. “We take this very seriously; inflation cannot be picked up and moved where you want it. We are committed to make sure inflation does not remain too low” and “get it back to target.”