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Fed reduces monetary stimulus for fifth month in a row

At the end of their two-day policy meeting, the Federal Reserve’s Open Market Committee decided Wednesday to reduce monthly asset purchases by $10 billion to $45 billion beginning in May.

Despite disappointing growth figures out Wednesday, the committee noted that economic growth has increased since their last meeting in March, when economic conditions were more sluggish, thanks, in part, to a brutal winter.

The good news, the FOMC reports, is that household spending “appears to be rising more quickly.” The unemployment rate, however, is still high, and the housing recovery remains slow. But the economy looks strong enough, the FOMC concludes, that they expect labor market conditions to improve.

The Fed has been tapering — or gradually drawing down its monetary stimulus — since January. At the beginning of the financial crisis in 2008, the Fed started buying $85 billion a month of mortgage-backed securities and longer-term Treasury securities to keep long-term interest rates low and stimulate the economy in a policy known as quantitative easing, or QE.

As they did at their last meeting, the FOMC reiterated that they expect to have to keep the federal funds rate low even after ending asset purchases, especially if inflation remains below their 2 percent target. The federal fund rate is the interest rate at which banks lend funds held at the Fed to other banks overnight.

For more about how the Fed reaches their policy decisions, watch Making Sense’s simulation of an Open Market Committee meeting.

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