Quantitative Easing

Tags: Quantitative easing, Federal funds rate, Federal Reserve System

  • School: Babson College, MA
  • Course: Financial Analysis
  • Professor: Zvi Quanqi
In her first Federal Open Market Committee meeting as head of the Federal Reserve Janet Yellen made good on her promise of continuity, again cutting back the central bank’s asset purchases. On Wednesday, the FOMC announced a third $10 billion reduction to quantitative easing, reducing its monthly bond purchases to $55 billion and keeping with Fed watchers’ tapering exceptions. The Fed will cut monthly mortgage bond purchases to $25 billion from $30 billion. Treasury purchases will drop to $30 billion a month from $35 billion. The stock market initially dropped slightly on the news, off of mixed signals leading up to the 2 p.m. release. Following the release The Dow Jones Industrial Average was down about .2% and the S&P was down close to .5%. The 10-year Treasury note yield climbed to 2.76%. In a press release announcing the reduction, the FOMC wrote, “Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement.” Looking ahead the committee reaffirmed its commitment to low interest rates by removing references to a 6.5% unemployment threshold, as expected. The committee wrote, In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” The Fed purchased $85 billion worth of bonds each month of last year as part of its efforts to stimulate the post-recession economy. In December 2013, the FOMC cut monthly asset purchases by $10 billion noting that the economy was...
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