The Federal Open Market Committee (FOMC) announced today that it will cut back again on quantitative easing (paring an additional $10 billion in bond purchases per month) as the economy slowly strengthens, but will keep the federal funds target range between 0% and 0.25%.
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.
Analysts had expected the target range to remain steady at next to nothing, but the decision to taper off mortgage-backed and Treasury securities was less set in stone. According to the announcement, the "cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions" pushed the Committee to its newest tapering resolution, which will put the Fed's bond buying at $65 billion per month.
This latest move mimics the Committee's December decision as it chips another $5 billion off both mortgage-backed and Treasury securities, putting monthly purchases at $30 billion and $35 billion, respectively.
Looking ahead, the Fed reiterated that a "highly accommodative" policy will remain appropriate for a "considerable time," even after the recovery improves and quantitative easing ends.
It also affirmed that it doesn't expect to increase interest rates until the unemployment rate drops below 6.5%, and perhaps not even then, depending on other economic considerations. The current unemployment rate stands at 6.7%.
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