Informing the public about the Federal Reserve
Why do the U.S. economic recovery and labor market require ongoing monetary policy support through the purchase of longer-term Treasury securities and agency mortgage-backed securities?
The Federal Reserve conducts monetary policy to foster its statutory objectives of maximum employment, price stability, and moderate long-term interest rates. Since late 2008, the Federal Open Market Committee (FOMC) has maintained a highly accommodative stance of monetary policy intended to support economic recovery and ensure that inflation, over time, remains stable and near its longer-run goal of 2 percent. In December 2008, the FOMC reduced its target for the federal funds rate, its usual policy tool, to near zero percent. With policy interest rates at their lower bound, the Committee has used alternative policies since that time, including large-scale asset purchases and forward guidance regarding the path of the federal funds rate, to provide additional stimulus for the economic recovery. The Committee has undertaken several asset purchase programs intended to put downward pressure on longer-term interest rates and make broader financial conditions more accommodative. In late 2012, the Federal Reserve began a flow-based purchase program under which it initially purchased mortgage-backed securities at a rate of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of this program, the Committee decided at its December 2013 meeting to modestly reduce the pace of its asset purchases beginning in January 2014. At its subsequent meetings in January, March, April, June, and July of 2014, the Committee decided to make further measured reductions in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities will continue to support the recovery by maintaining downward pressure on longer-term interest rates, such as mortgage rates, and by making broader financial conditions more favorable for household and business spending and investment.
The Committee will closely monitor incoming information on economic and financial developments in the coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace 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.