Fed Continues Taper: No Surprise or Vote of Confidence for Economy?

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Coming as no surprise, the Federal Reserve tapered its monthly bond buying by a further $10 billion, dropping its monetary stimulus to $45 billion per month. This decrease represents the fourth consecutive $10 billion reduction and puts the the bond-buying program, which was conceived in the aftermath of the financial crisis and recession, on track to conclude as soon as October.

Recent economic data “indicates that growth in economic activity has picked up … after having slowed sharply during the winter in part because of adverse weather conditions,” the central bank said in a Wednesday statement released after a two-day policy meeting of the Federal Open Market Committee. While business investment has “edged down,” as the first quarter’s gross domestic product numbers show, consumer spending “appears to be rising more quickly,” the central bankers noted. More broadly, the Fed’s move to further decrease its monthly asset purchases is a vote of confidence in the U.S. economy.

The Fed’s gradual reduction of its extraordinary monetary stimulus program will soon end an initiative — designed to decrease borrowing costs in order to boost stronger consumer and business spending — that more than quadrupled the central bank’s balance sheet to $4.2 trillion. With the conclusion of the bond-buying program in sight, the Fed is preparing for a number of important policy decisions to bring its balance sheet back to fairly normal levels. More importantly, the decision will lift the benchmark short-term interest rate, or federal funds rate, from the near zero level maintained since late 2008.

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