The Federal Reserve would only veer from its plans to reduce the trillions in stimulus it has provided if the economy were to undergo an unforeseen shock, Chair Janet Yellen said.
On the same day the Fed announced it will start rolling off its $4.5 trillion balance sheet portfolio of Treasurys and mortgage bonds, Yellen said the program likely will continue as long as the economy grows according to the central bank’s expectations.
The central bank chief said it would take a “material deterioration” in the economy before the Fed backs off the program. Failing that, the Fed would consider lowering interest rates to help the economy out of a slowdown, but would only increase its balance sheet if there were no other alternatives.
“We have said that if there were a type of material deterioration to the outlook, we could face a situation where the federal funds rate isn’t a sufficient tool to adjust monetary policy, we might stop rolloffs from our balance sheet and resume the reinvestment,” she said at a post-Fed meeting news conference.
“As long as we believe we can use the federal funds rate as a tool, that is what we intend to do.”
The Fed accumulated most of the balance sheet during three rounds of bond buying aimed at keeping mortgage rates low and goosing economic activity.
Following this week’s two-day meeting, the policymaking Federal Open Market Committee said it will start allowing a capped amount of proceeds from the bonds to roll off. That cap will start off at $10 billion a month and increase quarterly until it reaches $50 billion.
Yellen said it’s unlikely the Fed will use interest rate cuts as its preferred way of helping the economy along.
“We understand pretty well what the effects are on the economy. Market participants understand how that tool is used, and it would likely be adjusted in response to shocks to the economy,” she said. “That’s our go-to tool. That is what we intend to use.”
Source: cnbc economy
Fed won't stop cutting back on stimulus unless economy hits another big downturn, Yellen says