MercoPress. South Atlantic News Agency

Fed further tapers bond-buying program but concerned with labor market

Chairperson Yellen, “indicators suggests that there remains significant ”underutilization of labor resources”

The Federal Reserve said on Wednesday that US growth in economic activity rebounded in the second quarter and labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant “underutilization of labor resources”.

 The central bank’s policy-making committee, FOMC, sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2% has diminished somewhat.

In the minutes of its June meeting, the Fed indicated it could conclude its bond-buying program in October as long as economic activity continues at its current pace. The FOMC said on Wednesday that beginning August it will buy mortgage-backed securities at a pace of 10 billion a month and longer-term Treasury securities at a pace of 15 billion per month – a reduction of 5 billion for each class of asset.

“The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate”.

Likewise the FOMC will closely monitor incoming information on economic and financial developments in coming months and “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”.

In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation.

Nevertheless it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.

FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

All committee members voted for the policy decision, except for Philadelphia Federal Reserve Bank President Charles Plosser who “objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for 'a considerable time after the asset purchase program ends,' because such language is time dependent and does not reflect the considerable economic progress that has been made toward the committee's goals.”