Fri, Jan 31, 2014 page5

• In last Bernanke act, Fed further reduces stimulus

  TAPERING: The Federal Reserve offered a rosier take on the US economy’s prospects than it did last month and largely shook off soft employment growth last month

  • Reuters, WASHINGTON
  • • 
    • 
    • 

  The US Federal Reserve on Wednesday decided to trim its bond purchases by another US$10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.

  The action was widely expected, although some investors had speculated that the US central bank might put its plans on hold given the jitters overseas.

  Fed Chairman Ben Bernanke, who hands the Fed’s reins to Vice Chair Janet Yellen today, managed to adjourn his last policy-setting meeting without any dissents from his colleagues. It was the first meeting without a dissent since June 2011 — a sign of how tumultuous Bernanke’s tenure has been.

  

  US Federal Reserve Chairman Ben Bernanke laughs during his semi-annual monetary policy report to the House Financial Services Committee in Washington on Wednesday. Bernanke said the central bank’s asset purchases “are by no means on a preset course” and could be reduced or expanded as economic conditions warrant.

  Photo: Bloomberg

  In addition to proceeding with plans to scale back its bond buying, the Fed made no changes to its other main policy plank: its pledge to keep interest rates low for some time to come.

  The decision suggests that it would take a serious threat to the US economy before the Fed backs down from a resolve to shelve the asset-purchase program later this year.

  Indeed, it offered a somewhat rosier assessment of the US economy’s prospects than it did last month, saying “economic activity picked up in recent quarters.” It also largely shook off surprisingly soft jobs growth last month.

  “Labor market indicators were mixed, but on balance showed further improvement,” it said.

  “They really want to move to the sidelines here and get out of the [bond buying] business,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

  All 17 top Wall Street economists polled by Reuters on Wednesday expect the Fed to wind the program down by year’s end, and nearly all believe the Fed will not raise rates until at least the third quarter of next year.

  Major US stock indices closed down more than 1 percent, while yields on the benchmark 10-year Treasury note hit the lowest level since late October. The US dollar rose against the euro, but was little changed against a broad basket of currencies.

  Importantly, the Fed stuck to its promise to keep rates near zero until well after the US unemployment rate, now at 6.7 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target. Some analysts had speculated it might alter this guidance, given how close the jobless rate is to the rate-hike threshold.

  In its statement, the Fed said it would buy US$65 billion in bonds per month starting next month, down from US$75 billion now. It shaved its purchases of US Treasuries and mortgage bonds equally.

  “The Fed’s action today represents a continuation of its resolute determination to end [bond purchases] during 2014,” said Daniel Alpert, managing partner at Westwood Capital in New York. “The policy has hit its ‘sell by’ date.”

  In announcing its decision, the Fed made no reference to the sell-off in emerging markets that has depressed US stocks in recent days.

  Markets in countries with large current account deficits, such as Turkey and Argentina, have suffered steep losses in part because of the prospect of less US monetary stimulus.

  These currencies and stocks slumped again after the Fed’s announcement, offsetting aggressive interest rate hikes by Turkey and South Africa.

  The US central bank launched its current round of bond purchases in September 2012, its third such effort since the darkest days of the financial crisis in late 2008.

  The effort to bring the purchases to a halt will now fall to Yellen, who has strongly backed the unprecedented actions the Fed has taken to boost growth and get more Americans back to work. She is to chair her first policy meeting on March 18-19.

  Bernanke, a professor and leading scholar of the Great Depression before joining the Fed, took the central bank far into uncharted territory during his eight years on the job, building a US$4 trillion balance sheet and keeping interest rates near zero for more than five years to pull the economy from its worst downturn in decades.
• Most Popular

  • 1

    Manchester United tap Carrick as interim coach

  • 2

    Taiwan passport rises three spots in global ranking

  • 3

    Harden steps up late as Clippers edge Raptors

  • 4

    Cooper Flagg hurts ankle in Mavericks loss to the Nuggets

  • 5

    Morocco and Senegal reach final of Cup of Nations