Fed Bond Purchases to Slow Down Later This Year
The minutes of the Federal Open Market Committee (FOMC) meeting held in June were released yesterday, revealing the Fed’s intentions for tapering off quantitative easing (QE) later this year, and sparking a minor rally on Wall Street. After moving into positive territory, the Dow dropped and closed slightly lower, breaking its four-day advance, while the S&P 500 closed with a small gain on Wednesday. When Federal Reserve Chairman Ben Bernanke suggested in June that the economy’s expansion appeared strong enough to allow the central bank to slow down its bond purchases later in the year, investors apparently took this to mean that the Fed could potentially start pulling back as early as September. The FOMC minutes do not support this, but rather suggest that the job market needs to be stronger and steadier before the Fed would reduce bond purchases and while some felt confident this would be soon, remarks made by Bernanke at a news conference following the meeting suggested bond purchases would likely slow down later in the year, with a view to ending them in mid-2014, if the economy continued to show signs of strengthening.
The FOMC minutes showed that there was a lack of consensus as to when exactly bond purchases should slow down and when they should cease. Although Bernanke stressed at last month’s conference that the Fed would step up its bond purchases again in the event of the economy weakening, investors were alarmed, stocks and bond fell and interest rates climbed. Following the release of the minutes of the meeting, Bernanke emphasized that easing off on bond buying will not affect the Federal Reserve’s commitment to promote economic expansion while reducing unemployment. Since the bond purchases started in September, an average of 204,000 jobs per month has been added – a marked improvement over the 174,000 jobs per month in the first nine months of 2012. Nonetheless, unemployment remains at 7.6%. The Fed has made it known that it plans to keep short-term interest rates close to zero until unemployment drops below 6.5 percent, and even in that event, will review the situation before raising them.