By Isaac Cohen*
Nobody was surprised by the Federal Reserve announcement, last week, of an increase in the federal funds rate of a quarter percentage point, to between 1 and 1.25%. At this cautious pace, the projection is that there will be another similar increase this year and also three more in 2018.
According to Federal Reserve Chairwoman Janet Yellen, the purpose is “to allow the market to adjust to a very gradual and predictable plan.” The proposal describes the way the central bank intends to dismantle the policy of quantitative easing, reducing the extraordinary magnitude of its more than $4 trillion portfolio of Treasuries and mortgage backed securities. These assets were purchased to support the moderate but sustained recovery of the US economy from the Great Recession, which has now reached nine years, the third longest expansion on record.
In October 2014, the central bank stopped purchasing new securities, only reinvesting maturing assets to stabilize the size of its portfolio. Starting “relatively soon,” analysts say perhaps in September or October, the central bank will allow $6 billion in Treasuries and $4 billion in mortgage backed securities to mature without reinvestment. These amounts will increase gradually to $50 billion monthly, $30 billion in Treasuries and $20 billion in mortgage bonds. It should be mentioned that this is the first time the central bank implements this kind of plan.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio, UNIVISION, TELEMUNDO and other media. Former Director, UNECLAC Washington.
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