Wednesday, January 29, 2014

Federal Reserve trims asset purchases by another $10 bln

    The Federal Reserve, the U.S. central bank, will trim its monthly asset purchases by another $10 billion in February to a total of $65 billion and repeated that it expects to maintain its policy rate at the current 0-0.25 percent "well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."
    The Fed, which last month decided to wind down its extraordinary accommodative monetary policy by reducing monthly asset purchases to $75 billion from $85 billion, said it "will likely reduce the pace of asset purchases in further measured steps at future meetings" if the U.S. jobs market continues to improve and inflation moves back toward the Fed's goal.
    The Fed acknowledged the improving U.S. economy, saying "growth in economic activity picked up in recent quarters," dropping the description that activity was "expanding at a moderate pace."
   The Fed also said spending by households and business investment "advanced more quickly in recent months," a slightly more upbeat description than last month when the Fed said household spending and business investment "advanced."
    The Fed's decision was widely expected as economists had not expected the recent volatility in financial markets, including the plunge in emerging market currencies, to deter it from continuing to normalize monetary policy at the last meeting headed by Ben Bernanke before he hands over the reins to Fed vice chair Janet Yellen.
    The U.S. unemployment rate dropped to 6.7 percent in December from 7.0 percent in November, but  the Fed again said it remains elevated. Some of the decline in the unemployment rate is due to people leaving the workforce.
    In December the Fed pared its decision to start winding down quantitative easing by pledging to keep rates low even when the jobless rate dips below its threshold of 6.5 percent. Most economists first expect the Fed to start raising rates late 2015 while its asset purchases should finished by October.
    In its latest forecast from December, the Fed sees the U.S. jobless rate easing to between 6.3 and 6.6 percent this year before falling to 5.8-6.1 percent in 2015.  
     But the Fed again cautioned that its decision to reduce asset purchases in "measured steps"at future meetings was not on a "preset course" and remains contingent upon the outlook for the labor market, inflation and the likely efficacy and costs of continued purchases of U.S. government bonds and mortgage-backed securities.
    U.S. headline inflation remains well below the Fed's 2.0 percent objective, though it rose in December to 1.5 percent from November's 1.2 percent.
    The Fed again said that it considers inflation persistently below its objective as a risk to the economy.
    U.S. economic growth picked up in the third quarter, with Gross Domestic Product expanding by 2.0 percent from the same quarter in 2012, and economists expect stronger growth in the fourth quarter.
    The Fed started its third round of quantitative easing - known as QE3 - in September 2012 by purchasing $85 billion a month of U.S. Treasury bonds and mortgage-related debt. In May 2013 Bernanke then said the Fed was considering reducing the size of its purchases in the next few meetings.


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