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US Federal Reserve on course to end QE3 in October
Federal Reserve sends clear message that reduction in asset purchases remains on track
Last month, committee members agreed to reduce its monthly bond-buying scheme by a further $10bn to $35bn in July Photo: Hisham Ibrahim
By Szu Ping Chan
8:08PM BST 09 Jul 2014
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The US Federal Reserve is on course to end its multi-billion dollar bond buying programme in October, minutes from its latest meeting showed on Wednesday.
The minutes of the Federal Open Market Committee's June meeting showed that policymakers "generally agreed" that the Fed's latest round of quantitative easing (QE) should be wound down in three months time if the recovery remained on track.
The Fed has been cutting its purchase of Treasury and mortgage-backed securities by $10bn a month at each meeting, from a peak of $85bn. It plans to add a further $35bn of bonds this month, $25bn in August and September, and a final $15bn tranche in October.
"If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting," the minutes said.
The Fed had previously refused to commit to a tapering timeline, and insisted in April that "the pace of asset purchases was not on a preset course" and remained data dependent.
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The Federal Reserve's famous "dot chart", which shows where Fed policymakers believe interest rates will be over the next three years, as well as over the long term. For example, the dots for 2014 show that fifteen policymakers believe rates will be unchanged at 0.25pc at the end of this year. The top chart shows policymakers' latest projections, while the chart below shows expectations in March, illustrating a slight dovish shift in expectations. (Source: Federal Reserve).
Economists at Goldman Sachs and JP Morgan have brought forward their expectation of a US interest rate rise in recent days amid stronger labour market data. However, the Fed said its clarification on QE3 had "no consequences for the eventual decision about the timing of the first increase in the federal funds rate", which it said would depend on the Committee’s "evolving assessments" of the economy.
The minutes also showed that some policymakers were concerned that investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.
“Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes showed.
Last month, the Fed sharply downgraded its expectations for America’s economic growth in 2014. The FOMC believes the world’s largest economy will grow by between 2.1pc and 2.3pc this year, down from earlier forecasts of 2.9pc.
Policymakers said the outlook remained positive after the big winter slowdown. Most participants said they expected growth in the world's biggest economy to "pick up notably in the second half of this year and remain in 2015 and 2016 above their estimates of the longer-run normal rate of output growth".
The minutes added: "Participants generally judged that real GDP growth in the first half of this year was held down by transitory factors depressing output early in the year, and they pointed to a number of factors that they expected would continue to contribute to a pickup in economic growth later this year and next, including rising household net worth, diminished restraint from fiscal policy, improving labor market conditions, and highly accommodative monetary policy."
Federal Reserve sends clear message that reduction in asset purchases remains on track
Last month, committee members agreed to reduce its monthly bond-buying scheme by a further $10bn to $35bn in July Photo: Hisham Ibrahim By Szu Ping Chan
8:08PM BST 09 Jul 2014
4 Comments The US Federal Reserve is on course to end its multi-billion dollar bond buying programme in October, minutes from its latest meeting showed on Wednesday.
The minutes of the Federal Open Market Committee's June meeting showed that policymakers "generally agreed" that the Fed's latest round of quantitative easing (QE) should be wound down in three months time if the recovery remained on track.
The Fed has been cutting its purchase of Treasury and mortgage-backed securities by $10bn a month at each meeting, from a peak of $85bn. It plans to add a further $35bn of bonds this month, $25bn in August and September, and a final $15bn tranche in October.
"If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting," the minutes said.
The Fed had previously refused to commit to a tapering timeline, and insisted in April that "the pace of asset purchases was not on a preset course" and remained data dependent.
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The Federal Reserve's famous "dot chart", which shows where Fed policymakers believe interest rates will be over the next three years, as well as over the long term. For example, the dots for 2014 show that fifteen policymakers believe rates will be unchanged at 0.25pc at the end of this year. The top chart shows policymakers' latest projections, while the chart below shows expectations in March, illustrating a slight dovish shift in expectations. (Source: Federal Reserve).
Economists at Goldman Sachs and JP Morgan have brought forward their expectation of a US interest rate rise in recent days amid stronger labour market data. However, the Fed said its clarification on QE3 had "no consequences for the eventual decision about the timing of the first increase in the federal funds rate", which it said would depend on the Committee’s "evolving assessments" of the economy.
The minutes also showed that some policymakers were concerned that investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.
“Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes showed.
Last month, the Fed sharply downgraded its expectations for America’s economic growth in 2014. The FOMC believes the world’s largest economy will grow by between 2.1pc and 2.3pc this year, down from earlier forecasts of 2.9pc.
Policymakers said the outlook remained positive after the big winter slowdown. Most participants said they expected growth in the world's biggest economy to "pick up notably in the second half of this year and remain in 2015 and 2016 above their estimates of the longer-run normal rate of output growth".
The minutes added: "Participants generally judged that real GDP growth in the first half of this year was held down by transitory factors depressing output early in the year, and they pointed to a number of factors that they expected would continue to contribute to a pickup in economic growth later this year and next, including rising household net worth, diminished restraint from fiscal policy, improving labor market conditions, and highly accommodative monetary policy."
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