U.S. Fed cuts monthly bond-buying to $55B a month
Fed chair Janet Yellen says interest rate increases unlikely for a 'considerable period'
The U.S. Federal Reserve is continuing with its slow reduction of stimulus to the economy, reducing its monthly bond buyback program by $10 billion US to $55 billion a month.
It was a move widely expected by the markets and indicates the U.S. central bank believes the economy is strengthening.
The Fed statement issued at 2 p.m. Wednesday pointed to slowing economic growth and a deteriorating labour market early in the year, but said some of the slowdown was weather related.
“There is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions,” it said in its statement.
The statement made by the Fed’s powerful open market committee warned investors that assets purchases are not on a preset course, an indication that the central bank is prepared to slow or speed up the pace of its tapering if necessary and that its unemployment rate target is flexible.
Balancing joblessness and inflation
It also said it is balancing its goals of maximum employment with the need to boost inflation to the two per cent level, considered more healthy than the current level of 1.5 per cent. It won't raise the federal funds rates, which in turn affect interest rates, from the 0 to .25 per cent range until it is nearing its goals on both indicators, the statement said.
“The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run,” it read.
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The Fed has just completed two days of discussions, the first as Fed chair for Janet Yellen, a position she assumed Feb. 3, after Bernanke stepped down after eight high-profile years.
In her press conference, Yellen explained why the Fed is backing away from the numerical target of 6.5 per cent it had set last year as a goal. She said it is not a change of policy, but a change in forward guidance.
“As joblessness gets close to 6.5 per cent, markets want to know, people need to understand, what happens after that,” she said.
“The purpose is to understand what we (the Fed committee) will be looking at after the unemployment rate falls below 6.5 per cent,” she added.
Yellen said the bond-buying program could be winding down by this fall, but she expects it will be a “considerable period” after that before interest rates rise.
At that time, the central banker said the Fed will be considering “a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments."
A relaxed Yellen discussed her concerns about the current labour market, including the high rate of self-employment, the low level of labour participation and high youth unemployment.
She made reference to many “Main Street” issues, including high consumer debt, the housing market and how joblessness is affecting communities, saying she tries to stay in touch with what’s happening with real people in the economy.
Yellen said there was no difference in the kind of discussions the FOMC has had in the past two days under her leadership than there has been in the past eight years under Bernanke.
“I feel very lucky that I have a lot of Fed experience. It’s complicated and in many ways I feel the buck stops with me... in making progress in getting the economy back on track,” she said.
She also gave some insight into the committee’s deliberations, including its assessment of the ups and downs it has experienced this winter.
“We spent a lot of time discussing the weather and how it’s affect businesses and households in various parts of the country,” Yellen said.
Stock markets dipped while yields on U.S. Treasuries rose in response to the Fed dropping the unemployment rate as its definitive yardstick for gauging the U.S. economy's strength. Investors interpreted Yellen's remarks to mean a more hawkish position on rates, meaning they might rise in mid-2015.
With files from the Associated Press