The US Federal Reserve (Fed) is once again looking at its tapering options to ease back on its $85bn-a-month asset purchases by year end but actions to mitigate this scaling back are also being explored, as revealed by the minutes of the latest rate-setting Federal Open Market Committee (FOMC).
To offset the negative market reaction when scaling back its quantitative easing (QE) programme was last investigated the Fed’s FOMC unit is simultaneously considering cutting the interest it pays to banks on their reserves, according to a report in the ‘Financial Times’. Cutting this could drive down already low overnight interest rates in the US to just a few basis points, speculated the ‘FT’, adversely impacting bank profits but adding extra stimulus to the wider US economy.
Reducing the existing 25 basis points of interest the Fed pays to banks on the $2.5tn they hold in reserves because of the QE programme would impact banks’ on-going mission to build up healthier capital bases for the post-crash regulatory regime outlined under Basel III, but it would signal a continuation of a loose monetary policy and aid wider economic growth, reasoned the FOMC.
No definite options or timeframes for the ending of the Fed’s latest QE3 round of asset purchases was given in the minutes but the exploration of mitigation measures by the FOMC shows the topic is still top of mind for US authorities.
According to the minutes of its October meeting, discussed in the ‘FT’ report, most officials on the FOMC thought the rate-cutting move “could be worth considering at some stage” as a means to make clear its desire to support the wider economy with a loose monetary policy post-QE.
The dollar strengthened on the news as the minutes were circulated over the wires, while stocks fell slightly. No big reaction was evident as finance professionals await more concrete news about the Fed’s definitive tapering plans, which are linked to healthy employment and growth figures.
The next full policy meeting is scheduled for 17-18 December. The timing of the anticipated tapering announcement could be linked to the change at the top of the Fed with the Reserve’s chair, Ben Bernanke, due to leave in the new year as his successor, Janet Yellen, takes over the reins. Preparing the ground for the end of QE would certainly be nice way to hand over to the new chair, if not a good valedictory move in and of itself.
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