Wednesday, September 18, 2013

Fed continues with $85 billion of monthly asset purchases

    The U.S. Federal Reserve will continue to purchase $85 billion worth of mortgage-backed securities and long-term Treasury bonds a month "until the outlook for the labor market has improved substantially in a context of price stability."
    The decision by the Federal Reserve took financial markets by surprise as the overwhelming majority of economists and analysts had expected the Fed to start reducing its purchases of assets this month due to the recent decline in the unemployment rate.
    The Federal Reserve's policy making body, the Federal Open Market Committee (FOMC) said the economy and labor market had improved over the last year when its began its latest asset purchase program, known as Quantitative Easing 3, despite the impact of the cuts in the federal deficit.
    "However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the FOMC said after a two-day meeting.
    "The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability," it added.
    "In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective," the Fed said, adding that asset purchases were not on preset course and the pace of the purchases will depend on conditions in the labor market.
    The Fed affirmed that it still expects to keep the federal funds rate between zero and 0.25 percent at least as long as the unemployment rate is above 6.5 percent and inflation is below 2.5 percent.
    The U.S. unemployment rate has been declining steadily from a high of 10.0 percent in October 2009 to 7.3 percent in August but much of the improvement has also been due to workers no longer seeking jobs.
    In its latest economic projection, the Fed revised upward its forecast for the unemployment rate to 7.1-7.3 percent this year from its June forecast of 7.2-7.3 percent, the 2014 forecast to 6.4-6.8 percent from a previous 6.5-6.8 percent and the 2015 forecast to 5.9-6.2 percent from a previous forecast of 5.8-6.2 percent.
    The U.S. economy is forecast to expand slower than previously expected. The Fed's latest forecast calls for real Gross Domestic Product to expand by 2.0-2.3 percent this year, down from the June forecast of 2.3-2.6 percent. Next year GDP is forecast to expand by 2.9-3.1 percent, down from a previous forecast 3.0-3.5 percent and in 2015 to expand by 3.0-3.5 percent, slightly down from 2.9-3.6 percent.
    For the first time, the Fed also released its forecast for 2016 growth, forecasting growth of 2.5-3.3 percent and an unemployment rate of 5.4-5.9 percent.
    The Fed's preferred measure of inflation, the PCE, is expected to remain below the Fed's target of 2.0 percent through 2016.
    In the second quarter of this year, the U.S. GDP rose by a quarterly 2.5 percent for annual growth of 1.6 percent, up from 1.3 percent in the first quarter.  Headline inflation rate eased to 1.5 percent in August from 2.0 percent in July.


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