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Economic Watch: Fed Further Reduces Stimulus Program

March 19, 2014

By Evan Lockridge

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The U.S. Federal Reserve on Wednesday announced it would further reduce a stimulus program for the nation’s economy and is leaving interest rates unchanged.

It will cut its $55 billion monthly bond-buying program, known as quantitative easing, back another $10 billion. This will be the third cut the Fed has made since announcing late last year it was tapering this program that was originally $85 billion per month.

Also, in a surprise move, it is removing a target of a 6.5% for unemployment before raising interest rates. Currently the unemployment rate is at 6.7%.

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“In determining how long to maintain the current zero to 0.25% target range for the Federal Funds rate (the interest rate banks charge to lend money to one another), the committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation,” it said in a statement.

“In other words, a 6.7% unemployment rate will be judged in the context of the participation rate, the workweek, the augmented unemployment rate, all of which have shown markedly less improvement and paint a much more dire picture of labor market conditions,” said Linsey Piegza, chief economist with the investment firm Sterne Agee.

She notes the Fed also reiterated that it is likely to maintain the current target range on the Federal Funds rate for a “considerable time” after an end of quantitative easing, especially if inflation continues to run below the committee’s target.

“The Fed recognizes that part of their challenge is to convince the market that an end of quantitative easing is not an end of accommodation, continuing to highlight the extended period expected between an end of monthly bond purchases and the first Fed Funds rate hike,” Piegza said

She believes even after both employment and inflation targets are met, the Fed will continue to asses economic conditions from a broader lens and may or may not continue to keep accommodation in place.

“The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” said the Federal Reserve.

"In other words, in terms of the timeline for the first fed rate hike, 2015 can become 2016 or beyond pretty easily," said Piegza.

You can read the Fed’s detailed comments about its actions and its views on current economic conditions on its website.

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