independent

Friday 18 April 2014

Fed to cut bond purchases by £6bn

Federal Reserve chairman Ben Bernanke speaks during a news conference in Washington (AP Photo/Susan Walsh)

The US Federal Reserve says it will reduce its 85 billion dollars (£52bn) a month in bond purchases by 10bn dollars (£6.1bn) starting in January, citing a stronger US job market.

It says it will take further steps to reduce the pace of the purchases next year if that improvement continues.

The reduction is a signal that Fed policymakers are ready to ease their massive support for the economy provided since the Great Recession. The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

To cushion to impact on financial markets, the Fed strengthened its commitment to record-low short-term rates. It says it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5%.

AP

Stocks surged after the Fed's policy statement was released, signalling investors approved of the modest tapering and the stronger pledge to keep short-term rates low for an extended time.

The Dow Jones industrial average rose more than 150 points minutes after the announcement.

In a policy statement released after its two-day meeting, the Fed says it will reduce its purchases of mortgage-backed securities and Treasury bonds each by five billion dollars (£3bn). Beginning in January, it will purchase 35 billion dollars (£21bn) in mortgage bonds each month and 40 billion dollars (£24bn) in Treasuries.

The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

The Fed's actions were approved on a nine to one vote. The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.

The Fed's action comes after encouraging reports that show the economy is accelerating.

Hiring has been robust for four straight months. Unemployment is at a five-year low of 7%. Factory output is up. Consumers are spending more at retailers. Car sales haven't been better since the recession ended four and a half years ago.

What's more, the stock market is near all-time highs. Inflation remains below the Fed's target rate. And the House has passed a budget plan that seems likely to avert another government shutdown next year. The Senate is expected to follow suit.

One factor of concern for some members is inflation, which remains historically low. The Fed's optimal rate is 2%. For the 12 months ending in October, consumer inflation as measured by the Fed's preferred index is just 0.7%, well below its target.

But the Fed sees inflation slowly moving toward its target, according to its most recent economic projections that were released Wednesday. The Fed projects inflation would range between 1.4% and 1.6% next year and could reach the Fed's target in 2015 at the earliest.

Fed officials still project economic growth of roughly 3% next year. But they are slightly more optimistic about unemployment, predicting it could fall as low as 6.3% in 2014, down from a low of 6.4% forecast in September.

AP

Press Association

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