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Fed Tapers Bond Purchasing by another $10 billion, Points to Improving Labour Market

H.S. Borji
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The Federal Reserve announced today it plans to reduce the pace of bond purchasing by another $10 billion, as the central bank continues to roll back record stimulus in measured steps leading to its full elimination in October.

“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” read the central bank’s official statement. “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.”

Beginning in August the Fed will ease $25 billion each month into the financial markets. The Fed will add to its holdings of mortgage-backed securities at a pace of $10 billion per month rather than $15 billion, and will add to its holdings of Treasury securities by $15 billion per month rather than $20 billion.

Central bankers left the overnight rate unchanged at 0.25 percent.

Today’s decision came amid growing evidence the US economy was gathering momentum after severe weather weighed on output in the first quarter. US gross domestic product grew at an annual rate of 4 percent in the second quarter, as the US economy eked out gains in the first half of the year.

The economy contracted 2.1 percent in the first three months of the year, up from the previous estimate showing a 2.9 percent drop.

Perhaps the most convincing sign the US economy is rebounding is the labour market, which continues to improve at a rapid pace. US nonfarm payroll employment exceeded 200,000 for the sixth consecutive month in July, the Labor Department is expected to show Friday.

The US economy in the first half of 2014 has added an average of 231,000 new jobs each month, the strongest since 2007. This in turn has helped push the unemployment rate down to 6.1 percent, a nearly six-year low.

The unemployment rate has dropped 1.4 percentage points over the past year.
Jobless claims – a narrower measure of unemployment – fell to a more than eight-year low in the week ended July 19.

The Labor Department on Thursday is expected to show a pick-up in jobless claims in the week ended July 26.

A stronger than forecast labour market recovery in the second half of the year may push the Federal Reserve to consider raising interest rates early next year. Earlier this year Fed Chair Janet Yellen indicated the central bank may begin lifting rates six months after the end of quantitative easing.

At the same time, the Fed has acknowledged prevailing weakness in the economy, including slow wage growth and a disappointing housing recovery that began stalling last summer after mortgage rates started to climb.

Regardless of the exact timing of a Federal Reserve rate hike, the days of ultra-loose monetary policy are numbered. Some critics of the Fed believe low interest rates have boosted stock markets to unsustainable levels and encouraged dangerous risk taking.

Today marked the sixth consecutive time the Fed has cut asset purchases. The tapering process was initiated in December 2013 by then-Chairman Ben Bernanke. The Fed’s balance sheet has swelled from $800 billion to $4.3 trillion over the past five years.

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