Fed announcement tops headlines
Monetary policy tops this week’s headlines, as a series of central bank announcements promise to keep investors occupied for the foreseeable future. The Bank of England and European Central Bank will make monetary policy announcements Thursday, giving investors a taste of what’s to come on the European side of the Atlantic. On the North American side, the US Federal Reserve gave its interest rate decision Wednesday, followed by a monetary policy announcement that acknowledged the improving state of the economy. However, the Fed was clear persistently low inflation could drag down economic recovery, and pledged to maintain the current pace of monthly asset purchases. As expected, the benchmark lending rate was left unchanged.
The Federal Open Market Committee gave a measured response following its two-day policy meetings, maintaining its commitment to the 2 percent inflation target. The FOMC anticipates inflation will rise to its target level over the mid-term, but declined to give a timetable for when it expects this occur. A timetable for when the Fed expects to reach its targets could help market participants determine at what point, and in what capacity, tapering is likely to occur. It is widely believed stimulus tapering will commence as early as September, with complete rollback of asset purchases as early as 2014 (when the US economy is expected to reach its inflation and employment targets).
Despite the Fed’s firm stance Wednesday, some analysts still anticipate a September tapering announcement. One of those analysts is Mark Vitner, a senior economist at Wells Fargo. According to Vitner, “The bottom line for the Fed is the downside risks for the economy are diminishing,” which suggests it’s only a matter of time before the Fed looks to reduce its stimulus program, which has swelled to a record $3.57 trillion.
The Fed’s decision to stand firm on tapering comes shortly after official data showed the US economy grew faster than expected. Second quarter GDP advanced 1.7 percent, following a 1.1 percent gain the previous quarter. ADP employment figures also beat expectations, showing the US economy added 200,000 jobs in July.
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