Wednesday, April 30, 2014

Fed trims QE by $10 bln, rate low for considerable time

    The Federal Reserve, the central bank of the United States, trimmed its asset purchases by another $10 billion to $45 billion in May, as widely expected, and reiterated that it still expects to maintain the current target range for the benchmark federal funds rate "for a considerable time after the asset purchase program ends," especially if inflation is below the 2.0 percent target.
    The Fed, which has kept the fed funds rate at its current level of 0.0-0.25 percent since December 2008, also said economic activity had picked up recently after slowing during the winter, partly due to adverse weather, and pointed out that "household spending appears to be rising more quickly," a more upbeat assessment than in March when it said household spending had advanced.
    However, this more upbeat assessment was balanced by the comment that business fixed investment had edged down. In March the Fed said investment had advanced.
    The Fed started winding down its asset purchases of Treasury bonds and housing-related debt in January and has now cut its monthly purchases in half from $85 billion.
    The Federal Open Market Committee (FOMC), the Fed's policy making body, repeated that it was likely to reduce the pace of asset purchases "in further measured steps at future meetings," but purchases were not on a preset course and depend on the outlook for the labor market and inflation.

    The Fed is maintaining its policy of reinvesting payments from its bond holdings and expects its sizable, and still rising holdings, to maintain downward pressure on longer-term interest rates, supporting the economic recovery and helping ensure that inflation eventually rises to the Fed's goal.
    Inflation in the United States, as in other advanced economies such as the euro area, is below central banks' target.
    In March the headline U.S. inflation rate picked up to 1.5 percent from 1.1 percent in February, easing the prospects of deflation.
    In addition to maintaining price stability and moderate interest rates, the Fed's mandate also dictates that it should work toward "maximum employment" and repeated today that the unemployment rate remains elevated though on balance it had improved.
    In March, the U.S. unemployment rate was unchanged at 6.7 percent from February and on April 16 in New York Fed Chair Janet Yellen said she expects it to take more than two years for the unemployment rate to decline to a more normal rate of between 5.2 and 5.6 percent.
    In its latest projections, the Fed sees the unemployment rate falling to 6.1-6.3 percent this year.
    In December 2012 the Fed started using the guidance that it would not consider raising rates until the jobless rate fell to at least 6.5 percent, but due to a faster-than-expected improvement in the labor market, this guidance was updated in December last year when the Fed said it would maintain rates "well past" the time the jobless rate fell below 6.5 percent.
    With the unemployment rate expected to drop below the 6.5 percent level in coming months, the Fed last month scrapped the link between policy rates and the jobless rate. Instead, the Fed is now taking into account a wide range of information to help it determine how long to maintain the current rages, including labor market conditions, inflationary pressure and financial developments.
    "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run," the Fed said.
    The Fed's view that economic activity has picked up comes after data showed that U.S. economic activity slowed sharply in the first quarter, with economists attributing this to the impact of cold weather in most of the country.
    U.S. Gross Domestic Product expanded by only 0.1 percent in the first quarter of this year from the fourth quarter of 2013's growth of 2.6 percent. On a year-to-year basis, first quarter GDP rose by 2.3 percent.


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