Fed Reserve continues tapering bond purchases

The US Federal Reserve is continuing to taper its monetary policy of quantitative easing, announcing on Wednesday that it will pare monthly purchases of Government-backed bonds from $75 billion to $65 billion starting in February.

Meanwhile, the Fed’s monetary policy committee left its benchmark interest rate near zero.

After buying bonds at a pace of $85 billion a month since September 2012, the Fed last month announced its long-awaited taper, paring the pace back by $10 billion to $75 billion in January.

The bond purchases, even at the new, slower pace, are meant to make the safe haven of US Government debt less available, forcing investment into the private sector.

“The committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate,” the Fed said.

Tapering will likely continue in “further measured steps.” The Fed is due to issue its next monetary policy decision on March 19.

Wednesday was the last meeting for Fed Chairman Ben Bernanke, whose term expires on Friday. His deputy, Janet Yellen, will become the first woman to lead the 100-year-old central bank, after the Senate voted January 6 to approve her nomination by President Barack Obama.

The central bank expects to maintain current interest rates — set at an unprecedented near-zero since December 2008 — “for a considerable time” after the bond-buying ends and likely long after unemployment falls below 6.5 per cent, as long as inflation does not exceed 2.5 per cent and longer-term inflation expectations are “well anchored.”

“The committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 per cent, especially if projected inflation continues to run below the committee’s 2 per cent longer-run goal,” the Fed said in its policy statement.

Data reported in recent weeks “indicates that growth in economic activity picked up in recent quarters,” the Fed said.

The Fed’s monetary policy statement followed the Commerce Department’s upward revision last month of third-quarter growth to an annualised 4.1 per cent, the fastest rate of expansion in two years.

The unemployment rate declined in December to a five-year low of 6.7 per cent, but payroll growth was anaemic and the labour-force participation rate shrank, suggesting discouraged workers were no longer job hunting. “Labour market indicators were mixed but on balance showed further improvement,” the Fed said.

Twelve-month core consumer inflation was stable last month at 1.7 per cent.

Consumer spending, business investment and the housing recovery were slower in recent months, while spending cuts in the federal budget were easing. “Fiscal policy is restraining economic growth, although the extent of restraint is diminishing,” the central bank said.

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