Fed ends bond buying, exhibits confidence in US recovery
Friday, 31 October 2014 02:00
Reuters: The Federal Reserve on Wednesday ended its monthly bond purchase program and signalled confidence the U.S. economic recovery would remain on track despite signs of a slowdown in many parts of the global economy.
“The Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability,” the central bank’s policy committee said in a statement following a two-day meeting.
The statement largely dismissed recent financial market volatility, dimming growth in Europe and a weak inflation outlook as headwinds that would do little to undercut progress toward the Fed’s unemployment and inflation goals.
The Fed pointed to strengthening labour markets, saying that slack in labour markets was “gradually diminishing.”
It retained its basic language regarding interest rates from recent statements, saying that rates would remain low for a “considerable time” following the end of the bond purchases this month.
The timing and pace of rate hikes would depend on incoming economic data, the Fed said, new language that apparently earned the support of Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, who dissented at the previous meeting.
On inflation, the Fed acknowledged that lower energy prices and other forces were holding inflation down, but that overall the economy should progress toward the central bank’s 2% target.
“The Committee judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year,” the statement said.
Minneapolis Fed President Narayana Kocherlakota was the only dissent on the grounds that a downturn in inflation expectations meant the Fed should commit to keeping interest rates lower for longer.The decision to shutter the bond-buying program was almost foregone. The monthly purchases had been steadily cut from $85 billion to $15 billion as part of the Fed’s gradual turn away from policies launched to fight the 2007-2009 recession and breathe more life into a tepid recovery.
The Fed will continue reinvesting the proceeds of securities that mature each month, meaning its more than $4 trillion balance sheet will remain intact for the time being.
Asia stocks fall, dollar surges on Fed’s hawkish twistReuters: Asian stocks were mostly lower and the dollar surged to a three-week high versus the yen after the US Federal Reserve ended its massive quantitative easing programme, as expected, but laced its economic assessment with a tinge of hawkishness.
Spreadbetters expected a more stable start for Europe, forecasting an effectively flat open for Britain’s FTSE, Germany’s DAX and France’s CAC.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.6%.
In a statement on Wednesday after a two-day meeting, the Fed ended its quantitative easing programme of bond purchases. At its peak, the program pumped $85 billion a month into the financial system.
The Fed did retain its basic guidance that overnight borrowing costs would remain near zero for a “considerable time”.
But it dropped the characterisation of the US labour market slack as “significant” in a show of confidence in the economy’s prospects, the part markets perceived as containing a slightly hawkish turn.
“The Fed was widely expected to end quantitative easing (QE) but barely anyone anticipated such a significant upgrade to their labour market assessment,” Kathy Lien, Managing Director at BK Asset Management in New York, said in a note to clients.
Tokyo’s Nikkei bucked the trend in Asia and rose 0.7%, as investors took heart from a significantly weaker yen and outlook for exporters following the Fed’s optimism over the US economy.
“The market is relieved as the rates would remain low for some time while seeing a recovery in the US economy,” said Nobuhiko Kuramochi, a strategist at Mizuho Securities in Tokyo.
The dollar hovered near a three-week peak of 109.145 yen after rallying nearly 0.7% overnight in light of the Fed’s statements, while the euro fell to a three-week trough of $1.2605.
The greenback benefited as US Treasuries surged, with the benchmark 10-year Treasury note yield spiking to a three-week high of 2.362% as market participants pulled forward expectations of when the Fed would eventually raise interest rates.
“In the near-term, rates will likely move modestly higher from here, especially in the front end of the yield curve, as we assign a higher probability to the Fed beginning to hike in mid-2015. Also, I like the U.S. dollar, as this environment of diverging central bank actions looks to be a multi-year trend,” said Erik Weisman, fixed income portfolio manager at MFS Investment Management.
With the Fed meeting out of the way the Bank of Japan’s policy decision on Friday is next in the spotlight, with focus on whether the central bank continues to show confidence in meeting its inflation target even though growth is flagging. The strength of the US currency was a blow to the New Zealand dollar, which tumbled on a softening stance over future interest rate increases by the Reserve Bank of New Zealand.
Brazil surprised late on Wednesday by hiking interest rates in a bold move that signals President Dilma Rousseff could make market-friendly policy changes after her narrow re-election victory on Sunday.
The rate hike could give the Brazilian real a further lift. It had fallen to a nine-year low against the dollar on Monday after Rousseff defeated market-friendly challenger Aecio Neves, but recovered ground as some of the pessimism faded.