US Federal Reserve Confirms ‘Modest’ Start to Tapering

The US Federal Reserve has, as expected, confirmed a ‘modest reduction’ in its economic stimulus programme – a process dubbed ‘tapering’.

From next month the Fed will buy US$75bn in bonds each month, a US$10bn reduction from the US$85bn in monthly purchases that it has made since September 2012.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed said in a statement. It will pare back both types of bond purchases – mortgage-backed securities (MBS) and Treasuries – each by US$5bn per month.

At a news conference following the announcement, the Fed’s outgoing chairman, Ben Bernanke said that the committee had ‘enhanced’ its forward guidance on keeping US interest rates low until America’s unemployment rate falls to 6.5% or the annual inflation rate exceeds 2.5%. “The committee is determined to avoid inflation that is too low, as well as inflation that is too high,” Bernanke added.

According to reports only one committee member, Eric Rosengren of the Boston Federal Reserve, formally dissented with the Fed’s decision. He argued that unemployment is still too high and inflation too low to begin pulling reducing the economic stimulus.

Bernanke began hinting in May that tapering would begin later in the year and would end the bond-buying programme completely in 2014, by when unemployment was likely to have dipped to 7%. Stock prices began falling and bond yields rose over the summer in response.

However, Fed meetings in July, September and October were not accompanies by any action and the stimulus programme was maintained last month when the unemployment rate fell back to 7% ahead of schedule.

Bernanke will attend one more policy meeting next month, before his term as Fed chairman ends on 31 January and Fed policy is taken over by his probable successor, Janet Yellen, who was nominated by president Obama for the position in October. The Senate is expected to confirm her appointment this week.

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