Forex News – Fed carries on with taper
January 30, 2014 12:03 pmVideo
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The Federal Reserve’s bond buying program which began in late 2008 is slowly being wound down. At the central bank’s first policy meeting of 2014, Fed policymakers unanimously voted in favor of continuing to taper its QE program, slashing it by another $10 billion beginning February 1st. This is the second cut in the $85 billion-a-month-bond purchase program, bringing it down to an overall $65 billion ($35 billion of Treasuries and $30 billion of Mortgage Backed Securities). Meanwhile, this was the first unanimous vote since 2011.
Ben Bernanke seemed determined to continue with the current strategy, as there has been a strong rebound in the US economy. This was Bernanke’s final meeting as Chair of the Fed. Janet Yellen replaces him on February 1st.
The statement released after the monetary policy announcement was very little changed from December’s statement and did not even have a dovish tone. The Fed pledged to keep rates between 0-0.25% as long as the unemployment rate remains above 6.5% and the 1-2 year projected inflation remains below 2.5%.
The only changes to the statement were that the Fed acknowledged that growth has “picked up in recent quarters” and “expanded at a moderate pace”. It will be interesting to see the fourth quarter GDP numbers due on Thursday. Expectations are for growth to have been around 3.2% in Q4 after a 4.1% pace in Q3.
Apart from tweaking its view on the economic assessment, the Fed also referred to the labor market and mentioned that “indicators were mixed but on balance showed further improvement”.
The gradual reduction in liquidity and “cheap” money from the Fed led to a drop in higher-yielding and riskier currencies. Therefore, after the Fed statement, the markets reacted negatively, with stock markets falling and the safe haven yen strengthening.
Also, it could be said that the markets need to see when the Fed will want to start lifting interest rates. It is clear until the unemployment rate reaches the 6.5% threshold, the Fed will not raise rates. The current unemployment rate sits at 6.7%. Data in coming weeks and months will be closely watched.
Meanwhile, with a new Fed Chair taking the helm on February 1st, it remains to be seen how Janet Yellen will deal with the Fed’s massive balance sheet which has quadrupled to $4 trillion since the height of the financial crisis and since the launch of QE.
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