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U.S. Federal Reserve to slow down bond-buying later this year


 

U.S. Federal Reserve Chairman Ben Bernanke just finished speaking at a much-awaited press conference in which he was expected to clarify whether, when and how the bank is going to start winding down its its current $85 billion a month bond-buying program known as quantitative easing.

What went down:

Tapering of bond-buying program set for late 2013.

The Fed plans to start drawing down on the amount of bonds it buys every month starting later this year and end such purchases by mid 2014, with the unemployment rate around seven per cent, Bernanke said. Such policy development, however, is contingent on the U.S. economy continuing to grow as the Fed expects. “Our policy is in now way pre-determined,” the chairman said, possibly in an effort to assuage concern among investors that the Fed might withdraw monetary stimulus even if the recovery shows signs of wavering. The slowdown in asset purchases, Bernanke said, is the equivalent of the Fed easing pressure on the gas pedal somewhat. It is not a slam on the breaks.

The Fed could keep interest rates at rock bottom even after U.S. unemployment hits 6.5 per cent.

In December 2012 the central bank said it would keep the target for short-term interest rates at between 0 and 0.25 per cent until the jobless rate had fallen to 6.5 per cent, assuming inflation didn’t rise past 2.5 per cent. Today, however, Bernanke seemed to hint that the Fed could decide to stick to record-low rates for longer. The 6.5 per cent benchmark is a “threshold,” not a “trigger,” the Chairman said. Reaching the benchmark would prompt the Fed to consider hiking rates. It would not set off an automatic policy decision.

The Fed also updated its economic predictions today, indicating the jobless rate could fall to 6.5 per cent in 2014. Still, most members of the Fed committee that sets interest rate policy expected a hike to happen in 2015, not 2014. The Fed’s target for the labour market, Bernanke explained, remains full employment—the situation in which every job seeker can easily find work—which the bank believes corresponds to 5-6 per cent unemployment in the U.S. (even in an ideal market, a certain number of people would be unemployed at any given time as they switch jobs). Thus, the Fed might decide to keep rates at extremely low levels even as unemployment falls past 6.5 per cent.

The Fed is not concerned about low inflation. The central bank continues to view the current low inflation as a temporary fluke. Price levels will continue to influence the Fed’s decision on its bond-buying program, Bernanke said, but there is little reason to believe ultra-low inflation will last.

The Fed is optimistic that the economy has finally turned the corner. Bernanke seemed confident that the private sector will continue to propel the recovery even with less of a push from the Fed, just as it has been able to keep GDP growing even as government cut spending and raised taxes earlier this year. The chairman cited rising house prices and growing consumer confidence among the chief developments colouring the Fed’s rosy view of the future.

 

 


 
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