Fed to Cut Bond Buying, Maintain Federal Funds Rate Target

The Federal Reserve is keeping the federal funds target range between 0% and 0.25%, but will begin to slowly taper off mortgage-backed and Treasury securities purchases, according to a report released today.

The federal funds rate is the interest rate at which large financial institutions lend and borrow money from their balances with the Federal Reserve, which affects the interest rates for all loans. By keeping the federal funds rate low, the Federal Reserve aims to promote borrowing money and discourage saving it, a recipe for increased economic activity.

In today's press release, the Fed noted that economic activity continues to expand at a "moderate pace." While labor markets, personal spending, and business investments have all picked up, slower growth in housing markets and restraining fiscal policy still point to a continually long road to recovery.

Starting in January, the Federal Reserve will cut back its mortgage-backed security and Treasury securities purchases by $5 billion each, taking them to $35 billion and $40 billion per month, respectively.

The report noted that the Federal Open Market Committee will continue to use a 6.5% unemployment rate as its potential turning point for federal funds target rate increases. The unemployment rate for November was 7.0%. However, it also noted for the first time that this number, in and of itself, may not be the financial signal it once was:

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Fed Chairman Ben Bernanke said the Federal Reserve's decision to slow its bond purchases is a sign of progress and he expects the Fed to take "similar moderate steps" throughout next year to reduce the purchases further if the economy shows continued improvement. Bernanke made the comments at a news conference. Bernanke cautioned that the Fed's further reductions in the purchases remain dependent on data.

-- Material from The Associated Press was used in this report.


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