Fed continues to pursue QE

19 Sep 13
The US Federal Reserve has decided to maintain its quantitative easing purchases at $85bn a month after concluding ‘more evidence’ was needed about the strength of the economic recovery before scaling back the programme.

By | 19 September 2013

The US Federal Reserve has decided to maintain its quantitative easing purchases at $85bn a month after concluding ‘more evidence’ was needed about the strength of the economic recovery before scaling back the programme.

In its latest examination of monetary policy, the Fed’s Open Market Committee said economic figures since it last met in July indicated economic output had been expanding at a moderate pace.

However, the committee also warned that federal government spending cuts posed an ‘important restraint’ on economic growth.

Given public spending reductions, the committee’s report said output growth in the last year was therefore ‘consistent with growing underlying strength in the broader economy’.

Overall risks to growth have diminished over the last year, the report stated, but there was a need for confirmation the recovery would be sustained before adjusting the pace of its purchases. It currently buys $45bn of US government debt a month, and $40bn of mortgage-backed securities.

The Fed would ‘continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labour market has improved substantially’.

Interest rates were also kept at the low target range of 0.25% following the committee meeting.

A statement from the Fed said ‘a highly accommodative stance of monetary policy’ would continue even after the asset purchase programme ends. It has pledged not to increase rates as long as the unemployment rate remains about 6.5%. It currently stands at 7.3%.

Following the meeting, Federal Reserve chair Ben Bernanke said the ‘unemployment rate remains above acceptable levels’.

He added: ‘In the committee’s assessment, the downside risks to the economy have diminished in the last year, reflecting among other factors somewhat better financial and economic conditions in Europe, and increased confidence on the part of households and firms on the staying power of the US recovery.

‘In addition, federal fiscal contraction remains an important restraint on growth and a source of downside risk.’

Keith Wade, chief economist at asset management firm Schroders, said the Fed had not been convinced that recent economic gains would be sustained.

‘The tightening in financial conditions was a worry following the rise in treasury and mortgage rates, although the Fed chair also expressed concern about the imminent budget debates, the debt-limit issue, and the possibility of a government shutdown.

‘The next date for the Fed to start tapering [its asset purchases] is October although given Bernanke's comments at the meeting, December may be more likely.’

Did you enjoy this article?

Related articles

Have your say

Newsletter

CIPFA latest

Popular

Most commented

Events & webinars