US Fed ends quantitative easing while keeping low interest rate pledge :: Mint

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The Federal Reserve confirmed it will end an asset-purchase programme that has added $1.66 trillion to its balance sheet and maintained a pledge to keep interest rates low for a “considerable time.”

“Labour market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said on Wednesday in a statement in Washington. “A range of labour market indicators suggests that underutiliza tion of labour resources is gradually diminishing,” the panel said, modifying earlier language that “there remains signifi cant underutilization of labour resources.”

Policy makers said that while inflation in the near term will probably be held down by lower energy prices, it repeated language from its September statement that “the likelihood of inflation running persistently below 2% has diminished somewhat.”

Chair Janet Yellen is completing two years of bond purchas es that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

Reinvesting Proceeds

The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest reces sion since the 1930s.

The latest round was announced in September 2012, with monthly purchases of $85 billion in treasuries and mortgage-backed securities. The Fed began a step-like reduction of purchases in January 2014, cutting them by $10 billion per meeting.

Minneapolis Fed president Narayana Kocherlakota dissented, saying that with low inflation expectations the Fed should com mit to keeping rates low “at least until the one-to-two-year ahead inflation outlook has returned to 2% and should continue the asset-purchase programme at its current level.”

As the Fed winds down unprecedented stimulus, the European Central Bank (ECB) is contemplating its own quantitative easing programme to tackle the weakest inflation in five years, and Japan is continuing purchases.

Bright Spot

“The US is a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts, and a former New York Fed research director. “Europe is still strug gling quite a lot, Japan seems to be up and down, and China’s having some growing pains at this point.”

A cooling global economy and declining inflation are posing risks to the outlook for the US, which saw growth accelerate in the second quarter to the fastest pace since 2011 and unemployment drop to a six-year low last month.

A number of officials said the five-year US expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” minutes of the 16-17 September FOMC meeting show. Fed governor Daniel Tarullo said at an 11 October event in Washington that he’s “worried about growth around the world.”

Market Volatility

The weakness, along with conflicts in Ukraine and the Mid east, sparked global market turbulence that sent the Standard & Poor’s 500 Index down as much 7.4% from its record close on 18 September, the day after the last Fed meeting. Ten-year treasury notes touched the lowest since May 2013.

The S&P 500 has since rallied to recover most of its drop, resuming an advance that has seen the index almost triple since March 2009. The 10-year treasury note yielded 2.3% late on Tuesday, below its 3.03% level at the end of last year.

The divergence in major economies has also helped lift the dollar against its major peers, restraining inflation and pushing back expectations for the timing of the first Fed rate increase. The Bloomberg Dollar Spot Index, which gauges the green back against 10 major currencies, has risen close to 6% since 1 July.

Fed funds rate futures show the probability of a rate in crease by the September 2015 FOMC meeting is about 42%, compared with 76% chance at the end of last month.

Balance Sheet

Even after purchases end, the Fed’s record balance sheet will provide support to the economy by limiting the supply of government securities and suppressing long-term interest rates. The FOMC has said it expects to stop reinvestments of maturing securities only after it raises the benchmark interest rate.

When the third round of large-scale asset purchases was an nounced, the jobless rate was 8.1%, and most policy makers forecast it would fall to 6% to 6.8% by late 2015. It’s now 5.9%. At the same time, weakness remains in some areas of the labor market, such as long-term unemployment.

While a 17% drop in oil prices this year has helped drive inflation farther below the Fed’s 2% target, it’s also giving consumers more to spend on other goods as gasoline prices fall to the lowest level in almost four years.

US chief executive officers see reasons for optimism. JPMorgan Chase & Co. CEO Jamie Dimon said last week that the world’s largest economy has “no real weak spot,” while Kenneth Jacobs, chief of investment bank Lazard Ltd., said on an earnings call that “the US economy continues to be resilient.” Bloomberg