Tuesday 23 July 2019

US Federal Reserve agrees to roll back on stimulus but divisions over timing

Ben Bernanke
Ben Bernanke

Policy makers at the US Federal Reserve are "broadly comfortable" with plans to begin rolling back the bank's stimulus measures later this year, although divisions remain over appropriate timing, according to the minutes of the last meeting of the Federal Open Market Committee (FOMC).

Earlier this year, the Fed chairman Ben Bernanke signalled that the bank could begin cutting the size of its bond-buying programme, currently worth $85bn per month, before the end of 2013, and potentially wind down the extraordinary measures by the middle of next year.

The minutes of the last meeting of the FOMC showed that bank policy makers were in broad agreement with the plan, if "economic conditions improved broadly as expected".

"And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014," the minutes said.

  "At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7pc, and inflation would be moving toward the Committee's 2pc objective."

However, some policy makers remained cautious about rolling back the support too soon. The announcement has triggered sharp swings in stocks, bonds and currencies as investors anticipate the Fed's next steps.

"A few members emphasised the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases," the minutes said.

Other policy makers were content to take action in the near future.

Investors and outside economists currently expect the latter group to prevail, pencilling in a reduction at the FOMC's September meeting.

The minutes showed that the Fed was looking at ways to roll back the stimulus, with policy makers being briefed on a possible "fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates".

Responding to the minutes, Jacob Oubina, a senior US economist at RBC Capital Markets in New York, said "anybody that was expecting the minutes to be overtly dovish is probably going to be disappointed".

"They continue to highlight that the employment backdrop has improved significantly, and to us that means that they're inclined to start the tapering process over the course of the next few months," he said.

The minutes showed the Fed officials were continuing to anticipate that growth would "pick up somewhat in the second half of 2013 and strengthen further thereafter".

Listed factors included "accommodative monetary policy, improving credit availability, receding effects of fiscal restraint, continued strength in housing and auto sales, and improvements in household and business balance sheets," the minutes said.


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