Paper Chase: Fed Decides Against Tapering

Fed Chair Ben Bernanke said the Fed would await evidence of a more stable economy before adjusting the pace of its asset purchases.

What is The Fed?

The Fed is the central bank of the U.S. whose objectives are to maximize employment, stabilize prices, and moderate long term interest rates. They have expanded to overseeing the nation’s monetary policy (raising or lowering interest rates), supervising and regulating banking institutions, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S, government and foreign official institutions.
 

Who Makes Up The Fed?

The Fed consists of a Board of Governors, twelve regional Federal Reserve Banks, the Federal Open Market Committee. The FOMC is responsible for setting monetary policy and consists of the seven Board of Governors and the twelve regional bank presidents, and privately owned U.S. banks as well as various advisory councils. The Fed also conducts its own economic research.
 

Where Does The Fed Get Its Authority?

The Fed’s authority comes from Congress and it’s subject to congressional oversight. The members of the Board of Governors, including its chairman (Ben Bernanke) and vice-chairman, are chosen by the President and confirmed by the Senate. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region, which entitles them to elect some members of the board of the regional Federal Reserve Bank.
 

Fed During The Great Recession

The Fed has “stimulated” the economy in three ways since the Great Recession. They provided lines of credit to financial and lending institutions. This cash infusion in turn, provided funds for consumer loans, which subsequently led to consumer buying. They engaged in quantitative easing, buying a significant amount of mortgages with the idea that the money would be used to buy mortgage debt and government bonds stimulating spending, reducing long-term interest rates and firing up the stock market. In 2011, the Fed enacted “Operation Twist” designed to make borrowing cheaper for businesses and consumers with the Fed selling short-term U.S. debt to buy long-term U.S. debt. They also began earmarking funds to buy bonds.
 

Decision Not To Taper

In its statement, the Fed said it would await evidence of a more stable economy before adjusting the pace of its purchases, expressing concerns of a sudden increase in borrowing costs undermining the economy. It even downgraded its forecast of the economy to 2 percent growth which many analysts predict will be the “new normal” for a stagnant economy and labor force though Bernanke did note improvement in the labor market.
 

Reinforced FFR

More important than even the decision not to taper its bond purchases was the reinforcement of the federal funds rate (rate at which banks can borrow from one another). The .25% rate will remain constant while unemployment remains above 6.5% and after inflation reaches 2%.
 

Forward Guidance

The Fed is providing forward guidance in its decision not to taper its bond purchases nor cut the federal funds rate. The Fed has been forthright in its handling of the economy through the recession. While we are in a still admittedly fragile market, rates have been naturally increasing when looking at the five and ten year treasuries.
 
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