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QE Program to End in October, FOMC Minutes Reveal

H.S. Borji
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www.finances.com

The final reduction in the Federal Reserve’s record bond buying program will likely occur after the October meetings, the minutes of the June 17-8 Federal Open Market Committee meetings revealed today.

“If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, the final reduction would occur following the October meeting,” the minutes of last month’s meetings showed.

The final stimulus cut would come with a single $15 billion reduction. To date, each of the Fed’s stimulus cuts has occurred in $10 billion increments.

On June 18 the Federal Reserve reduced the pace of its monthly asset purchasing program from $45 billion to $35 billion, citing a rebound in economic activity following the first quarter slowdown. The June meeting was the fifth consecutive occasion the central bank reduced its holdings of US Treasuries and mortgage-backed securities. The Fed under the leadership of Ben Bernanke initiated the tapering process in December.

The central bank kept interest rates on hold at 0.25 percent, unchanged since December 2008.

The latest rate decision was accompanied by a revised summary of economic projections from top Federal Reserve officials. Central bankers downgraded their 2014 forecast for economic growth from nearly 3 percent to between 2.1 percent and 2.3 percent following a disastrous first quarter that saw GDP contract 2.9 percent annually.

Top Fed officials also said long-term interest rates would probably stay below the historical average of 4 percent. This likely entails rate increases will be slow to materialize over the next several years.

Central bankers agreed most measures of labour market conditions had improved in recent months, after nonfarm payrolls employment expanded in April and May at a faster rate than the previous two quarters.

US nonfarm employment surged 288,000 in June, raising the three-month average to 272,000. June marked the fifth consecutive month jobs growth was above 200,000, the first stretch of its kind since 1999-2000.

Central bankers noted household spending had risen moderately in recent months, and said wage growth would be an important driver of consumer spending over the forecast period.

Earnings growth continues to be an area of concern, as wages have stagnated or barely risen in recent months. Average earnings increased 2 percent annually in the twelve months through June, well below the long-run average of around 3.5 percent.

A lack of earnings growth won’t help the US’ struggling housing recovery, which according to the minutes was still a major area of concern. Central bankers expressed concerns about persistently low residential construction and said restrictive lending conditions have kept demand for homes subdued.

In currency news, the US dollar index was little changed following the release of the 12-page document. The US dollar index was down 0.11 percent at 80.09.

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