The U.S. Federal Reserve plans to begin tapering its monetary policy of quantitative easing in January, announcing on Wednesday that it would pare purchases of government-backed bonds by 10 billion dollars to 75 billion dollars a month.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the (monetary policy) committee decided to modestly reduce the pace of its asset purchases,” the central bank said in a statement.
If the job market continues to gradually improve and currently muted inflation does not slip toward deflation, the Fed will “likely reduce the pace of asset purchases in further measured steps at future meetings,” but bond buying is “not on a preset course.” The Fed expects to maintain current interest rates - set near zero since December 2008 - at least until 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.” Congress’ two-year budget agreement is better for the U.S. economy than the 16-day government shutdown in October, Federal Reserve Chairman Ben Bernanke said.
“Relative to where we were in September and October, it certainly is nice that there’s a bipartisan deal,” he told reporters after the central bank’s last regular meeting of the year.
The Fed’s monetary policy statement did not mention the budget deal, which passed the Senate minutes after Mr. Bernanke spoke and was headed to President Barack Obama to be signed into law. The central bank did note that the drag on the economy from cuts that took effect in March “may be diminishing.” In addition to easing some of those budget cuts, the budget compromise “will be good for confidence” by removing fiscal uncertainty, Mr. Bernanke said.
He emphasized that larger, long-term deficit reductions are still needed, but that the budget deal was a promising sign: “Even if the outcomes are small, it’s a good thing that (congressional leaders) are working cooperatively and making some progress.”
US economy improves
In updated economic forecasts issued on Wednesday, the Fed predicted that unemployment would fall a bit further over the next two years than it thought in September. And it expects inflation to remain below the Fed’s target level.
The Fed expects the unemployment rate to dip as low as 6.3 per cent next year and 5.8 per cent in 2015. Unemployment has fallen faster this year than policymakers had predicted.
And Fed policymakers predict that their preferred inflation index won’t reach its target of 2 per cent until the end of 2015 at the earliest. For the 12 months ending in October, the inflation index is up just 0.7 per cent.
The Fed worries about very low inflation because it can lead people and businesses to delay purchases. Extremely low inflation also makes it costlier to repay loans.
In its statement, the Fed says it will reduce its purchases of mortgage-bonds and Treasury bonds each by $5 billion. Beginning in January, it will buy $35 billion in mortgage bonds each month and $40 billion in Treasuries.
The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.
The Fed’s actions were approved on a 9-1 vote. The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.
The Fed’s action comes after encouraging reports that show the economy is accelerating.
What’s more, the stock market is near all-time highs. Inflation remains below the Fed’s target rate. And the House has passed a budget plan that seems likely to avert another government shutdown next year. The Senate is expected to follow suit.
All of that could enhance the confidence of individuals, businesses and investors.
The economy is improving consistently, and the Fed is “now recognizing the trend and decided to go with the flow,” said John Silvia, chief economist at Wells Fargo.