Friday, January 2, 2015
US Federal Reserve to end quantitative easing programme
Central bank’s head, Janet Yellen, confirms cessation of buying bonds in October after injection of £4.5 trillion over five years.
The US Federal Reserve has called time on its $4.5tn bond-buying programme, halting a radical monetary policy introduced nearly six years ago to steer the world’s largest economy through the financial crisis.
The central bank, led by Janet Yellen, said the final tranche of bonds under its quantitative easing programme would be bought this month, but it committed to keeping record low interest rates for “a considerable time”.
Announcing the decision on QE, made at its October policy meeting, the Fed said: “The committee judges that there has been a substantial improvement in the outlook for the labour market since the inception of its current asset purchase programme. Moreover, the committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the committee decided to conclude its asset purchase programme this month.”
It brings to an end a programme which marked a departure for US monetary policy when it was launched in December 2008, hugely swelling the Fed’s balance sheet in an effort to prop up a battered financial system. The Fed began to slow its purchase of Treasury bonds and mortgage-backed securities in January, but until now it had not confirmed an end date. The central bank has steadily reduced its monthly bond purchases from a peak of $85bn a month to $15bn a month.
Despite the end of its bond-buying programme, US monetary policy remains ultra loose, with an interest rate range at a record low of between zero and 0.25% since December 2008.
The Federal Open Market Committee (FOMC) – the Fed’s policy setting committee – reiterated its commitment to leaving rates on hold in the coming months, despite a brighter economic backdrop.
“The committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0% to 0.25% target range for the federal funds rate for a considerable time following the end of its asset purchase programme this month, especially if projected inflation continues to run below the committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well-anchored.”
The FOMC sounded an optimistic note on the economy, suggesting recovery was on track with economic activity expanding at a moderate pace. Committee members pointed to falling unemployment, rising household spending and increased business investment.
Rob Carnell, economist at ING, said the FOMC was more positive on the economic outlook than in previous months.
“In terms of the commentary on the economy, the comments were undeniably more upbeat than they have been for a long time. The statement referred to solid gains in the unemployment rate, without trying to downplay them, and noted a gradually diminishing underutilisation of labour resources, instead of pointing out the existence of considerable slack.”
Annual inflation is below target at 1.7%, and expected to fall in the short term, partly as lower oil prices feed through, suggesting there is little pressure on the Fed to raise rates in the immediate future.The FOMC said: “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.”
Economists are divided on the likely timing of the first rise in US rates.
Carnell said: “Overall, while we agree with the Fed’s more upbeat assessment of the economy and labour market, in our opinion the likely dip in inflation over the year-end and first half of 2015 will keep the Fed on hold until the third quarter of 2015.”
Paul Ashworth, chief US economist at Capital Economics, disagreed, arguing the Fed was likely to raise rates “sooner than generally expected”, with March 2015 the most likely time.
The FOMC had one dissenting member at the October meeting, with Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, preferring to maintain QE purchases against a backdrop of sluggish inflation.
US markets were slightly lower after the announcement, with the Dow Jones Industrial Average down 0.2%, and the S&P 500 down 0.5%.
Loose monetary policy in the US has helped to foster growing confidence in global financial markets in the aftermath of the crisis.
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