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FOMC to mull post-QE exit strategy

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WASHINGTON (6/18/14)--When the Federal Open Market Committee (FOMC) concludes its two-day meeting today, the easy prediction is that it will announce a plan to shave yet another $10 billion off of its quantitative easing program.

The tougher task, analysts believe, is guessing what the Federal Reserve's monetary policy-making body will have decided, if anything, about what to do once that bond-buying program is completely phased out, almost a certain inflection point for the economy.

Both raising short-term interest rates from their near-zero levels and drawing down the Fed's now massive portfolio are on the table, but the timing and the pace of both moves remain up for debate.

The Fed won't maintain near-zero interest rates as the economy strengthens, nor will it maintain a $4.5 trillion balance sheet, Alan Blinder, economics professor at Princeton University and former vice chair of the Federal Reserve, told MarketWatch Monday.

The kicker is that the mere suggestion by the committee of one strategy or another can send waves through the market, meaning, no matter the FOMC's plan, it's likely the majority of the group will keep any decision as quiet as possible.

But there are serious disagreements among the FOMC, Binder told MarketWatch, adding that, without naming names, there are a number of members who don't hesitate to publicize their disagreements.

The backdrop for these decisions by the FOMC, in addition to updating its economic forecast and offering up new interest-rate projections this week, will be the state of the economy, which sputtered in the first quarter.

The committee will have to weigh the 1% contraction the economy experienced in the first quarter, headlined by an anemic housing market, and at the same time consider the 3-plus percent rebound in growth expected for the second quarter.

News of the Competition (06/18/2014)

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  • WASHINGTON (6/18/14)--The U.S. Justice Department turned down a $4 billion settlement offer from Citigroup last week, as the federal agency doesn't believe the amount adequately covers the damage inflicted by the big bank's alleged shoddy mortgage-lending practices that preceded the 2008 economic downturn (Forbes June 13). Government negotiators are seeking closer to $10 billion, according to reports, to recoup at least 10% of the $91 billion Citi sold in mortgage-backed securities leading up to the recession. Should Citi agree to pay $10 billion, it would be the second 11-figure settlement from a big bank in the last year, as JPMorgan Chase agreed to pay $13 billion in November to settle a dispute over its own mortgage-lending practices...
  • LAS VEGAS (6/18/14)--A pot industry payment processor, formerly called GreenHouse Payment Solutions, has joined up with two card-payment companies in order to equip marijuana dispensaries with the means to accept debit and credit cards, according to a GreenHouse press release. Combining the expertise of Advanced Content Services, Inc., and SinglePoint, Inc., the reconfigured and renamed GreenStar Payment Solutions, Inc. will allow marijuana businesses to cut down on non-cash payments, with the intention of improving convenience and reducing concerns about safety for both dispensaries and their customers, according to the release. GreenStar will hold its first official board meeting in Denver next month...

NEW: FOMC continues taper, hints at post-QE moves

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WASHINGTON (6/18/14 UPDATED p.m. 2:35 p.m. ET)--All along, the Federal Open Market Committee (FOMC) has said tapering its monthly bond-purchasing program is not on a set course, but despite a weak first quarter for the U.S. economy, the committee announced today it will continue to reduce its quantitative easing (QE) program by $10 billion.

The announcement came at the conclusion of the FOMC's two-day policy meeting this week.

The committee added that if the labor market continues its upward trend and if inflation continues to rise closer to the FOMC's longer-run objective of 2%, it will likely again taper asset purchases at its next policy meeting.

"The committee 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," the FOMC said.

The Federal Reserve's monetary policy-making body has been shaving down the amount of bonds and securities it has been buying over the last few months--purchases that have injected much-needed cash into the lending industry and subsequently the economy--by $10 billion every month.

With this most recent reduction, the Federal Reserve will purchase agency mortgage-backed securities at a rate of $15 billion per month, and Treasury securities at $20 billion per month.

Once the program sunsets, the committee must then turn to the decision of when, and by how much it should raise short-term interest rates that concurrently have helped lift up lending over the past few years.

FOMC members said in the statement that it will be appropriate to hold down the federal funds rate at near-zero levels for quite a while after the asset purchase program ends, especially if inflation fails to reach the committee's preferred 2% goal.

"The committee 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 long run," the committee said.

The committee also must craft a plan to disperse the trillions of dollars it has amassed through the bond-buying program. Though, the committee appears comfortable with its balance sheet for now, as it also said that its holdings of longer-term securities will help maintain downward pressure on interest rates, support mortgage markets, and help make broader financial conditions more accommodative.

"In turn (this) 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," the committee said.

The FOMC hosts eight policy-making meetings every year. The next meeting will take place July 29-30. Meeting minutes are released three weeks after the conclusion of a meeting.