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After keeping investors guessing for several months on when and how much it will taper its $85-billion-a-month bond buying programme, the Federal Open Market Committee (FOMC) finally decided to start tapering its third round of quantitative easing.
Beginning in January, MBS purchases will be reduced to $35 billion-a-month (from $40 billion/month) and the pace at which the Fed purchases longer-term Treasuries slows down to $40 billion-a-month (from $45bn/month).
Analysts suggest that the FOMC made this decision because of the reduction in unemployment since the start of QE3 (quantitative easing) and the stronger non-farm payrolls in recent months.
Key takeaways
If incoming information broadly supports the FOMC’s expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at further meetings.
Bernanke said that the expectations of the Committee are similar moderate steps. If they taper by $10 billion at each meeting, the decision to end QE3 altogether will be taken in December 2014.
Asset purchases are not on a preset course, Bernanke said, and decisions about their pace will remain contingent on the Committee’s outlook for the labour market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
If economic data remains disappointing, the FOMC may skip a meeting or two. So, if we have for example one disappointing episode, the decision to terminate QE3 may fall in March 2015.
At the same time, the tapering process could also be speeded up on the back of stronger-than-expected data.
Currently, Bernanke expects QE3 to end late in the year (2014), rather than by mid-2014, as announced earlier.
For now, analysts suggest that the FOMC will decide to end QE3 in December 2014, after tapering by $10bn at each meeting (except for a final $5bn at the December meeting), with some risk that it will be early 2015.
Bernanke again stressed that the 6.5% unemployment rate is a threshold, not a trigger. He said that if the unemployment rate (which the FOMC still considers the best single indicator of the labour market) reaches 6.5%, the Committee will look at a broader set of variables, including additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
FOMC’s unemployment rate projections were revised downward compared to September. The central tendency for 2014Q4 was reduced to 6.3 – 6.6% (from 6.4%-6.8%).
Majority of FOMC participants, 12 out of 17, expect the first rate hike in 2015. Consistent with the notion that 6.5% is a threshold, not a trigger, Bernanke indicated that most expect the hike near the end of 2015.
Source: Rabobank Financial Markets Research
