Fed Reserve on pace to end bond purchases in 2014

The Federal Reserve continued marching on Wednesday towards ending its so-called quantitative easing by the end of the year, slashing the monthly purchases of Government-linked bonds by another $10 billion to $35 billion.

Taking effect in July, the latest cut continues a policy launched in January of regularly trimming the rate of bond purchases.

The Fed left its benchmark interest rate unchanged at the unprecedented, near-zero level in place since December 2008.

In a survey issued of the 16 members of the Fed’s policy-making committee, all but one expected the benchmark interest rate to remain unchanged through the end of 2014.

Thirteen members expect hikes in 2015, including 10, who expect to raise the rate to at least 1 per cent by the end of next year. By the end of 2016, 13 members expect the benchmark rate to reach at least 2 per cent, and six of them foresee the rate hitting 3 per cent.

Fed Chairwoman Janet Yellen said the slowing of bond purchases was based on an expectation of continued progress towards the economic goals of full employment and long-term inflation around 2 per cent.

“If incoming information broadly supports the committee’s expectation of ongoing improvement in labour markets and inflation moving back over time toward its longer-run objective, the committee will likely continue to reduce the pace of asset purchases in measured steps at future meetings,” she said.

“However, as I have emphasised before, purchases are not on a preset course, and the committee’s decisions about the pace of purchases remain contingent on its outlook for jobs and inflation as well as its assessment of the likely efficacy and costs of such purchases.” Since its last meeting in late April, economic data has supported staying the current course of monetary policy, the Fed said.

“Growth in economic activity has rebounded in recent months. Labour market indicators generally showed further improvement,” the Fed’s statement said.

“The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately, and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.” The Fed started the current round of quantitative easing in September 2012 at $85 billion a month — an annual pace of $1 trillion in the nearly $17 trillion US economy.

By denying access to safe-haven bonds, the policy was meant to push investment into the private economy at a time when the Fed felt it had to act to spur US growth and fend of the spectre of deflation. In the process, volatile investment flows spilled into developing economies with higher growth rates.

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