Members of the Federal Open Market Committee voted to continue tapering their bond-buying program, dropping to $45 billion in monthly purchases from $55 billion in March and $85 million per month throughout 2013.
FOMC members based their decision on information received since their March 19 meeting showing recent pickup in economic activity and some improvement in labor market indicators. If that improvement continues, further tapering is likely, but not on a preset course, FOMC members indicated in a statement issued Wednesday at the end of a two-day meeting. The pace of tapering “will remain contingent on the committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases,” the statement said.
“The market believes there is a high hurdle to changing the pace of tapering, so today's decision was on expectations,” said Steven Friedman, relationship manager, central banks and official institutions at Fischer Francis Trees & Watts.
Even after employment and inflation rates get to where FOMC members would like, the federal funds rate “may for some time” stay below normal, according to the FOMC statement. The current zero to 0.25% target range “likely will be appropriate … for a considerable time after the asset purchase program ends.”
Mr. Friedman, a former director of market analysis at the Federal Reserve Bank of New York, said the minutes from Wednesday's meeting, which will be released next month, will offer more clues. “The committee does seem to be restarting its discussions on exit strategy. We're going to be watching the minutes closely for indications of how and when different exit tools will be employed,” he said.
Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock, said more meaningful policy guidance could come after the FOMC's June 17-18 meeting. Market expectations are shifting to focus more on inflation as much as labor market and growth indicators, Mr. Rosenberg said. “Inflation measures take on a greater importance in affecting market expectations for monetary policy.”
“The risk in many areas of the fixed-income markets remains skewed to the downside,” Mr. Rosenberg said in a commentary on Wednesday's FOMC statement.