NEW YORK (TheStreet) -- All the "taper talk" in media coverage of Federal Reserve policy draws attention from the central bank's main policy tool and a major catalyst for the banking industry earnings over the next few years.
The Federal Open Market Committee on Wednesday announced a further reduction in the Federal Reserve's purchases of long-term bonds to a monthly net pace of $65 billion beginning in February. The Fed began its "QE3" bond purchases of $85 billion a month in September 2012 in an effort to hold-down long-term interest rates. After many months of anticipation, the FOMC in December announced the bond purchases would be cut to $75 billion in January.
The committee's next meeting is scheduled for March 18-19, and it's quite reasonable to expect further reductions in the Fed's massive balance-sheet expansion, since the central bank wants to move away from years of extraordinary policy measures and back to relying on its main policy tool, which is the short-term federal funds rate.
The federal funds rate has been locked in a historically low range of zero to 0.25% since late 2008.
The FOMC on Wednesday said it had "reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." The committee also repeated its past statement that the federal funds rate was likely to remain in its current range at least as long as the U.S. unemployment rate remains above 6.5%.
The unemployment rate improved to 6.7% in December from 7.0% in November, bringing it pretty close to the Fed's target. However, the lower unemployment rate was driven in part by a 0.2% decline in the labor participation rate to 62.8%. The labor participation rate declined 0.8% during 2013, as a large number of people were effectively driven from the labor force.