Fed Tapers QE: Employment and Inflation Outlook Optimistic

Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

Financial markets tripped over themselves on Wednesday after the U.S. Federal Reserve concluded a two-day policy meeting. The Federal Open Market Committee announced that it would begin to taper asset purchases beginning in January, reducing the combined flow rate of quantitative easing to $75 billion per month from $85 billion per month.

The FOMC instructed the Open Market Trading Desk at the New York Fed to reduce its purchases of longer-term Treasury securities from $45 billion to $40 billion and its purchases of agency mortgage-backed securities from $40 billion to $35 billion per month.

The decision to taper was made “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” Labor market conditions have improved fairly steadily over the past several years, but at a headline rate of 7 percent in November, unemployment, particularly long-term, “remains elevated.” This compares against a full employment target of between 5.2 and 5.8 percent headline unemployment.