Wednesday, July 30, 2014

Fed trims QE by another $10 bln, repeats rate to stay low

    The Federal Reserve, the central bank of the United States, will reduce its purchases of assets by another $10 billion to a total of $25 billion beginning in August and repeated its guidance that it "likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends."
    The Fed acknowledged that economic activity in the U.S. had rebounded in the second quarter and the labor market had improved, but added that "a range of labor market indicates suggests that there remains significant underutilization of labour resources," a clear sign that it believes it will take some time before it has met its objective of fostering maximum employment.
    In a statement following a meeting of the Fed's policy-setting body, the Federal Open Market Committee also repeated its view from June that spending by households appears to be rising moderately and business fixed investment is advancing while the recovery in the housing sector remains slow.
    The Fed has held its benchmark federal funds rate at 0 to 0.25 percent since the global financial crises in December 2008 and has bought a range of Treasury bonds and housing market debt since early 2009 to stimulate growth by holding down long-term rates.

    Encouraged by improving growth and declining unemployment, the FOMC started to slowly reduce its monthly asset purchases by $10 billion in January from $85 billion and minutes from its June meeting showed that the final purchase is expected to take place following its October meeting.
    In today's statement, the FOMC didn't alter its previous guidance that it would continue to purchase Treasuries and agency mortgage-backed securities until the outlook for the labor market has improved, but the pace of these purchases would likely be reduced in further measured steps if data supports its expectation of ongoing improvements in the labour market and inflation moves towards its longer-run objective of 2.0 percent.
    Since the publication of the June minutes, speculation over when the Fed would lift its federal funds rate has intensified, with expectations currently focusing on mid-2015, a view confirmed by the Fed's statement today that qualifies the fall in the U.S. jobless rate to 6.1 percent in June.
    Earlier today, data showed that the U.S. economy bounced back more than expected in the second quarter, with Gross Domestic Product expanding by an annual rate of 4.0 percent after contracting by a revised 2.1 percent in the first quarter due to harsh winter weather. Previously, first quarter GDP had been reported to shrink by 2.9 percent.



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