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Fed reduces stimulus despite slower growth projections

The Federal Reserve’s Open Market Committee voted unanimously Wednesday to again reduce its stimulus program by $10 billion to $35 billion in July.

Since the financial crisis in 2008, the Federal Reserve has been buying mortgage-backed securities and U.S. Treasuries in a policy known as quantitative easing, or QE. But since January, the Fed has been drawing down – “tapering” – those purchases by $10 billion a month as labor market conditions improve.

The unemployment rate has fallen to 6.3 percent from 6.7 percent since the last time the committee met. What the Bureau of Labor Statistics calls its “U6” measure of the un- and underemployed also fell during that time. The Fed projects the unemployment rate will be between 6 and 6.1 percent at the end of the year.

But during her press conference, Fed Chair Janet Yellen noted that part of the decline in the unemployment rate stems from a decrease in labor force participation — both for demographic reasons (baby boomers retiring) and from what she called a “shadow unemployment” problem of discouraged workers dropping out of the workforce. (To be counted as officially unemployed, people need to have looked for work.)

Real GDP declined in the first quarter, but Yellen said that largely resulted from “transitory factors,” while economic activity seems to be rebounding in the second quarter. There’s enough strength in the economy at this point, Yellen said, to support improvement in labor market.

But, also Wednesday, the Fed predicted that the economy would expand 2.1 to 2.3 percent this year, down from its projections in March of 2.8 to 3 percent growth for the year. Its long-term projections for 2015 and 2016, however, remain high.

Although the Fed takes pains to stress that its monetary policy “is not on a preset course,” it repeated Wednesday the likelihood of reducing asset purchases “in further measured steps” at its next meeting.

But as it has for the last several meetings, the Fed suggested it will be necessary to hold the target federal funds rate near one quarter percent long after it ends its asset purchase program, especially if inflation remains below their target of 2 percent. The federal funds rate is the interest rate for banks to deposit funds at the central bank.

Fed Vice Chair Stanley Fischer and board member Lael Brainard voted with the committee for the first time since winning Senate confirmation.

For more about how the Fed reaches its policy decisions, watch Paul Solman’s simulation of an FOMC meeting:

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