While you were sleeping Fed tapers again

Thursday 20th March 2014

US Federal Reserve policy makers said they cut their monthly bond-buying program by another US$10 billion as they upgraded their expectations for the rate of improvement in the US labour market.

Reducing the pace of its bond purchases to US$55 billion a month, the Federal Open Market Committee also did away with its 6.5 percent unemployment rate as a target to maintain record low borrowing costs.

"There is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions," the FOMC said in a statement released at the end of their two-day meeting. "With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance."

FOMC members forecast the unemployment rate will decline to be 6.1 percent to 6.3 percent in the fourth quarter of 2014, before sliding to 5.6 percent to 5.9 percent at the end of 2015, lower than the previous estimates.

"If incoming information broadly supports the Committee's expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings," the Fed said. "A highly accommodative stance of monetary policy remains appropriate."

Wall Street declined after the statement. In afternoon trading in New York, the Dow Jones Industrial Average fell 0.24 percent, the Standard & Poor's 500 Index dropped 0.46 percent, while the Nasdaq Composite Index slid 0.41 percent.

The Fed's view that the US economic recovery is progressing well is a double-edged sword. It is generally good news for corporate profits, and therefore equities, but the resulting decrease in monetary stimulus is less appealing.

Fed officials forecast their benchmark interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later, up from previous predictions.

That pushed US Treasuries lower.

"We are closer to the end of a stable-rate environment -- you have to adapt to the signal the change is coming," William Larkin, a money manager at Cabot Money Management in Salem, Massachusetts, told Bloomberg News.

In Europe, the Stoxx 600 Index ended the day with a 0.1 percent decline from the previous close, as did France's CAC 40. The UK's FTSE 100 fell 0.5 percent.

Germany's DAX bucked the trend, adding 0.4 percent. Shares of BMW climbed, closing 7 percent higher, after the German car maker predicted new models will boost sales.

BusinessDesk.co.nz

Comments from our readers

No comments yet