"Live Blog: Fed Policy Decision and Bernanke Press Conference"

From Real Time Economics:

• 2:18 pm
• Four Takeaways
• by Jon Hilsenrath

FED REDUCES BOND BUYING TO $75 BILLION
The Fed reduced its bond purchases from $85 billion per month to $75 billion per month, something it described as a modest move. Moreover, officials said they would likely reduce the program at future meetings in “measured steps.” The Fed said the move was made “in light of cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” More reductions are expected “in measured steps” at future meetings. But it depends on the economy living up to the Fed’s expectations and it is not on a preset course.

INFLATION IS THE CAVEAT
Fed officials have become a little more concerned about the outlook for inflation, which has been running below the Fed’s 2% objective for months. In October, the Fed’s preferred measure of inflation was up just 0.7% from a year earlier. Earlier in the year, the Fed said it expected inflation to start drifting back up toward the 2% goal, a point that was reflected in its policy statement. Today’s statement includes a shift. “The [Fed] recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward it objective over the medium term.” In other words, if inflation keeps undershooting its target, the Fed might have to alter the policy course it set out today. How would officials react to persistently low inflation readings? Stay tuned for Fed Chairman Ben Bernanke’s press conference.

FED STILL SEES SLOW RISE IN SHORT-TERM INTEREST RATES
The vast majority of Fed officials doesn’t expect the central bank to begin raising short-term interest rates until 2015 and three think the Fed won’t get started until 2016. The majority thinks that rate increases in 2015 will be modest and that the benchmark fed funds rate will remain below 1% by the end of that year. The majority also expects the fed funds rate to remain below 2% in 2016. These low rate expectations persist even though the Fed sees the unemployment rate falling below 6.5% next year. That 6.5% rate is the Fed’s threshold for when it will begin talking about rate increases. The forecasts show officials expect to keep rates low for a while even after that discussion begins. That point is reflected in a new line in the policy statement. The Fed expects that it likely to keep the fed funds rate near zero “well past” the time when the jobless rate reaches 6.5%....MUCH MORE with more to come.