US Federal Reserve tapers by $10 bn but stresses easy policy
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US Federal Reserve tapers by $10 bn but stresses easy policy

Last Updated: Friday, December 20, 2013, 01:21
 
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US Federal Reserve tapers by $10 bn but stresses easy policy
Washington: The US Federal Reserve trimmed its aggressive bond-buying program on Wednesday but sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.

In what likely amounts to the beginning of the end of its unprecedented support for the US economy, the central bank said it would reduce its monthly asset purchases by USD 10 billion, bringing them down to USD 75 billion.

The move, which surprised some investors, was a nod to better prospects for the economy and labor market and marks a historic turning point for the largest monetary policy experiment ever.

Fed Chairman Ben Bernanke said that if US jobs gains continue as expected, the bond purchases would likely continue to be cut at a "measured" pace through much of next year. They would probably be wound down "late in the year, certainly not by the middle of the year," he said.

"The recovery clearly remains far from complete," Bernanke told a news conference.

He said he consulted closely on the decision with Janet Yellen, the Fed`s vice chair who is set to succeed him after his second four-year term at the central bank`s helm ends on January 31. "She fully supports what we did today," Bernanke said.

Stocks initially dropped, but quickly rebounded and touched their highest levels of the day as Bernanke spoke. Similarly, bond prices slid but then bounced back. The dollar rose against the euro and the yen.

The Fed`s extraordinary money-printing has helped drive US stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets earlier this year as investors anticipated an end to the easing.

"They finally pulled a Band-Aid off that they`ve been tugging at for a long time," Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.

The central bank`s asset purchase program, a centerpiece of its crisis-era policy, has left it holding roughly USD 4 trillion of bonds, and the path it must follow in dialing it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.

The Fed said monthly purchases of both mortgage and Treasury bonds would be trimmed by USD 5 billion starting in January.

In a move aimed at forestalling a sharp market reaction that could undercut the recovery, the Fed said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the jobless rate falls below 6.5 percent, especially if inflation expectations remain below target.

The Fed has held rates near zero since late-2008.

It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 percent. The rate stood at 7.0 percent in November, a five-year low.

END TO AN ERA?

The Fed`s latest quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession. The Fed`s first QE program was launched in the midst of the 2008 financial crisis.

In fresh quarterly forecasts, the central bank lowered its expectations for both inflation and unemployment over the next few years, acknowledging the jobless rate had fallen faster than expected. It now sees it reaching a range of 6.3 percent to 6.6 percent by the end of 2014, from a previous prediction of 6.4 percent to 6.8 percent.

Three policymakers expect the first rate rise to come in 2016, up from only two in September, while 12 of the Fed`s 17 top officials still see the move in 2015.

The Fed`s asset purchases have stoked anxiety that they could unleash inflation or fuel hard-to-detect asset price bubbles. Even some within the Fed have worried about unintended effects.

Earlier on Wednesday, Brazil`s finance minister issued a plea for the Fed to end its buying sooner rather than later to reduce market uncertainty that has kept emerging economies on edge.

But some have credited the asset purchases with stabilizing an economy and banking system that had been crippled by the 2008 financial crisis and with staving off what could have been a damaging cycle of deflation.

One policymaker, Eric Rosengren of the Boston Fed, dissented against the decision, which he felt was premature given the still high unemployment rate.

Recent growth in jobs, retail sales and housing, as well as a fresh budget deal in Congress, had convinced a growing number of economists the Fed would trim the bond purchases. The program is meant to put downward pressure on long-term borrowing costs to stimulate investment and hiring.

But many thought the central bank would wait until early in the new year, given persistently low inflation and the fact that the world`s largest economy has stumbled several times in its crawl out of the 2007-2009 recession.



Reuters

First Published: Thursday, December 19, 2013, 01:45


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