Envisaged Fed tapering is simply predicated on five principles: (a) balance sheet expansion will slow and ultimately cease if unemployment declines on a sustained basis to around 7%, (b) the pace of asset purchases remains data dependent, hinging on sustained labor market improvement and financial conditions, (c) tapering is not meant to tighten monetary conditions, (d) tapering does not per se lead to subsequent unwinding of Treasury holdings and may never result in MBS sales, and (e) tapering does not per se bring forward Fed fund rate hikes, which are subject to higher thresholds.


Transcript of Chairman Bernanke’s Press Conference June 19, 2013 
http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130619.pdf
“Comments on Monetary Policy”, Governor Jeremy C. Stein, June 28, 2013 
http://www.federalreserve.gov/newsevents/speech/stein20130628a.pdf
“Thoughts on Unconventional Monetary Policy”, Governor Jerome H. Powell, June 27, 2013

 http://www.federalreserve.gov/newsevents/speech/stein20130628a.pdf
“The Economic Recovery: Past, Present, and Future”, President John C. Williams, June 28, 2013
 http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/june/the-economic-recovery-past-present-and-future/
Minutes of the Federal Open Market Committee, June 21–22, 2011
 http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20110622.pdf

Balance sheet expansion is set to slow and ultimately cease (maybe within a year) if labor market conditions improve on a sustained basis.

“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

[FOMC statement, June 19 and May 1]

“The Committee has been purchasing $40 billion per month in agency mortgage-backed securities and $45 billion per month in Treasury securities. When our program of asset purchases was initiated last September, the Committee stated the goal of promoting a substantial improvement in the outlook for the labor market in the context of price stability…the Committee may vary the pace of purchases as economic conditions evolve. Any such change would reflect the incoming data…as well as the cumulative progress made toward the Committee’s objectives since the program began in September [2012]… If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.”

[Transcript of Chairman Bernanke’s Press Conference June 19, 2013]

The FOMC views tapering as a reduction in the pace of additional stimulus, not a means to tighten monetary policy.

“Reducing or even ending our purchases does not mean the Fed will be tightening monetary policy. Not at all. The amount of stimulus our purchase program creates depends on the size of our securities holdings, not the amount we buy each month. Even if we start reducing our purchases later this year, our balance sheet will continue to grow, providing an increasing amount of stimulus. That is, as long as we are adding to our holdings of assets, we are adding monetary stimulus to the economy.”

[“The Economic Recovery: Past, Present, and Future”, President John C. Williams, June 28, 2013]

“Even if a modest reduction in the pace of asset purchases occurs, we would not be shrinking the Federal Reserve’s portfolio of securities, but only slowing the pace at which we are adding to the portfolio while continuing to reinvest principal payments and proceeds from maturing holdings as well. These large and growing holdings will continue to put downward pressure on longer-term interest rates. To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.”

[Transcript of Chairman Bernanke’s Press Conference June 19, 2013]

“By purchasing and holding large amounts of Treasury securities and MBS, we put additional downward pressure on term premiums and so on long-term rates.”

[“Thoughts on Unconventional Monetary Policy”, Governor Jerome H. Powell, June 27, 2013]

The pace of asset purchases remains data dependent, albeit on a broad trend basis and with increasingly specific economic benchmarks

“I would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed. Indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”

[Transcript of Chairman Bernanke’s Press Conference June 19, 2013]

“As time passes and we make progress toward our objectives, the balance of the tradeoff between flexibility and specificity in articulating these objectives shifts. It would have been difficult for the Committee to put forward a 7 percent unemployment goal when the current program started and unemployment was 8.1 percent; this would have involved a lot of uncertainty about the magnitude of asset purchases required to reach this goal. However, as we get closer to our goals, the balance sheet uncertainty becomes more manageable–at the same time that the market’s demand for specificity goes up… a key point is that as we approach an FOMC meeting where an adjustment decision looms, it is appropriate to give relatively heavy weight to the accumulated stock of progress toward our labor market objective and to not be excessively sensitive to the sort of near-term momentum captured by, for example, the last payroll number that comes in just before the meeting.

[“Comments on Monetary Policy”, Governor Jeremy C. Stein, June 28, 2013]

“In all cases, the path of policy will remain fully data-dependent. If economic growth, unemployment, or inflation do not meet the Committee’s expectations, or if financial conditions evolve in a way that is inconsistent with continued recovery, the Committee will respond.

[“Thoughts on Unconventional Monetary Policy”, Governor Jerome H. Powell, June 27, 2013]

Actual securities sales are a long way off

“All but one of the participants agreed on the following key elements of the strategy that they expect to follow when it becomes appropriate to begin normalizing the stance and conduct of monetary policy…To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA [System Open Market Account]…Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate…Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA’s holdings of agency securities over a period of three to five years…The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments.”

[Minutes of the Federal Open Market Committee, June 21–22, 2011]

“In the minutes of its June 2011 meeting, the Committee set forth principles that it intended to follow when the time came to normalize policy and the size and the structure of the Federal Reserve’s balance sheet…The broad principles set out in June 2011 remain applicable. One difference is worth mentioning…a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run, limited sales could be used to reduce or eliminate residual MBS holdings.”

[Transcript of Chairman Bernanke’s Press Conference June 19, 2013]

QE tapering is separate from Fed funds rate forward guidance

“The Committee expects a considerable interval of time to pass between when the Committee will cease adding accommodation through asset purchases and the time when the Committee will begin to reduce accommodation by moving the federal funds rate target toward more normal levels….The Committee reaffirmed its expectation that the current exceptionally low range for the funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent so long as inflation and inflation expectations remain well behaved in the senses described in the FOMC statement…The phrase ‘at least as long’ in the Committee’s interest rate guidance is important. The economic conditions we have set out as preceding any future rate increase are thresholds, not triggers. For example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6½ percent would not lead automatically to an increase in the federal funds rate target, but rather would indicate only that it was appropriate for the Committee to consider whether the broader economic outlook justified such an increase. …Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the federal funds rate, once they begin, are likely to be gradual.”

[Transcript of Chairman Bernanke’s Press Conference June 19, 2013]

“If, for example, inflation readings continue to be on the soft side, we will have greater scope for keeping the funds rate at its effective lower bound even beyond the point when unemployment drops below 6.5 percent.”

[“Comments on Monetary Policy”, Governor Jeremy C. Stein, June 28, 2013]