Fed shows faith in US economy with bond-buying reduction
Friday, 2 May 2014 00:43
Reuters: The Federal Reserve on Wednesday looked past a dismal reading on first quarter US growth and gave a mostly upbeat assessment of the economy’s prospects as it announced another cut in its massive bond-buying stimulus.
Recent information “indicates that growth in economic activity has picked up... after having slowed sharply during the winter in part because of adverse weather conditions,” the Central Bank said in a statement after a two-day meeting.
“Household spending appears to be rising more quickly,” it added, although it said business investment “edged down.”
The Fed said it would reduce its monthly bond purchases to $45 billion from $55 billion, a widely expected decision that keeps it on track to end the program as soon as October. The decision was unanimous.
Just hours before the statement was released, the government reported that the economy grew at only a 0.1% annual rate in the first quarter, but the Fed pinned its hopes on other recent data that has suggested activity is bouncing back.
Indeed, its statement was more upbeat than the one it issued after its last policy meeting on 19 March. At that time, it noted that activity had slowed, although it said harsh winter weather was at play.
“What the Fed is saying is ignore this first quarter number, it’s not reflective of the underlying strength in the economy,” said Phil Orlando, Chief Equity Market Strategist at Federated Investors in New York. Stocks closed up modestly, while prices for US government debt rose after the Fed’s announcement. The dollar, which had dropped on the disappointing news on first quarter growth, held steady against the euro and the yen.
The Fed has now reduced its monthly bond purchases by a cumulative $40 billion in four steady steps.
The gradual tapering seeks to close an era in which the central bank’s balance sheet quadrupled to more than $4.2 trillion through three separate purchase programs launched to battle the financial crisis and the recession and slow growth that followed.
The projected end of the program sets the stage for a series of policy decisions expected next year on when and how to reduce the balance sheet to more usual levels, and, most notably, when to move the target interest rate above the near zero level maintained since late 2008.
The Fed disclosed that its Board of Governors met on Tuesday to discuss “medium-term monetary policy issues,” the type of session that in the past has preceded important policy changes.