Fed Hints at Interest Rate Timeline, Markets and Treasuries Take Note

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Federal Reserve

As expected, at the March meeting of the Federal Open Market Committee, Federal Reserve policymakers decided to lower the central bank’s monthly monetary stimulus by another $10 billion a month in April — which places bond purchases at $55 billion. “A highly accommodative stance of monetary policy remains appropriate,” read the FOMC statement released Wednesday. What was more hotly anticipated by the market was how Fed Chair Janet Yellen — who served for three years as the vice chair of the central bank before replacing Ben Bernanke last month — would explain the central banks’ reasoning for keeping the benchmark interest rate, or federal funds rate, low.

Ahead of the two-day meeting, RDQ Economics’ Conrad DeQuadros noted that the Fed had put itself in “a little bit of a tricky situation” by justifying the need for continued low short-term interest rates despite the fact that unemployment has dropped faster than expected.

Since December, the central bank has been winding down its extraordinary economic stimulus program; the effectiveness of the Federal Reserve’s highly accommodating monetary policy was diminishing, and policymakers were well aware of that fact. Originally, the Fed began its assets purchases as a means to push down long-term borrowing rates so as to spur investing and hiring. Monetary stimulus was beginning to service an unproductive addiction to easy money more than the favorable dynamic of job creation, rising income, and increased spending that Yellen described in a November congressional hearing. For that reason, and because the economy was soldiering through a slow but real recovery, the FOMC announced at the conclusion of its December meeting that it would reduce the flow rate of assets being purchases for quantitative easing.

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