Business

Federal Reserve hints it could end asset purchases in 2014

  • 20 June 2013
  • From the section Business

The US Federal Reserve has maintained the rate of its asset purchase programme at $85bn (£54bn) a month, but could start scaling it back soon.

It also kept interest rates at a record low range of between zero and 0.25%.

Fed chairman Ben Bernanke said if the central bank's forecasts were correct, it could begin slowing asset purchases by the end of 2013 and wind them down completely by the middle of 2014.

But he emphasised that the programme was tied to economic conditions.

"We have no deterministic or fixed plan," Mr Bernanke told a press conference after the Fed's latest two-day monetary policy meeting.

The Fed painted a brighter economic outlook, in which it expects the unemployment rate to continue to fall and inflation to edge closer to its longer term target of 2%.

US stocks fell sharply in afternoon trading as investors digested a possible scaling back of stimulus measures. The Dow Jones dropped 206 points, or 1.3%, to close at 15,112.

Benchmark 10-year US bond yields jumped to a 15-month high on expectations the Fed will reduce its bond buying.

'Threshold, not trigger'

The Fed's asset purchase programme, in which it has been buying $85bn of government bonds a month, aims to lower long-term interest rates to encourage borrowing, spending and investing.

Mr Bernanke said that the tapering of the programme was akin to "letting up a bit on the gas pedal" and "not beginning to apply the brakes".

He added that interest rates were likely to remain low for some time after asset purchases concluded, and any rate rise was likely to be "far in the future".

The Fed has previously said that it would not consider raising rates until the unemployment rate, currently 7.6%, fell to 6.5%.

But Mr Bernanke stressed that this 6.5% level was "a threshold, not a trigger", saying that if unemployment were to fall below it, it would not immediately lead to a rate rise, but merely a consideration of the broader economic outlook.

Mr Bernanke also noted that inflation had been running below the Fed's 2% longer-run objective, but said that temporary factors were partly the reason for that.

Forecasts

In its latest statement, the Fed noted further improvement in labour market conditions in recent months, and said the downside risks to the jobs market and the economy had "diminished since the Fall".

In fresh quarterly projections, the central bank said it expects the US economy to grow between 2.3% and 2.6% in 2013.

It predicts an unemployment rate of about 7.2% to 7.3% by the end of the year, slightly lower than its March prediction. It expects unemployment to have fallen to 5.8% to 6.2% by 2015.

Alec Young, global equity strategist at Standard & Poor's in New York, told the BBC: "No matter how you look at it, we're closer to the end of this unprecedented stimulus than we were yesterday.

"They have increased at the margin their outlook for the economy - and what's going to drive an end to QE (quantitative easing) and tapering of their bond purchases, and ultimately a tightening of interest rates, is a healthier economy."

Inflation concerns

The Fed said inflation could run as low as 0.8% this year, but will pick up next year to between 1.4% and 2%.

"Inflation that is too low is a problem," Mr Bernanke said. "We expect inflation to come back up. That's our forecast. But... we are concerned about it."

"We would like to get inflation up to our target. And that will be a factor in our thinking about the thresholds. It will be a factor in our thinking about asset purchases."

Fourteen of the 19 Federal Reserve board members and bank presidents, who set out the quarterly projections, said they did not think it would be appropriate to raise interest rates until 2015. One member thought a rate rise would not be seen until 2016.

Mr Bernanke has been Federal Reserve chairman since 2006 and is expected to step down when his second term ends in January 2014.

President Obama has suggested that Mr Bernanke will not continue beyond the end of his term, saying in a recent interview that he had "already stayed a lot longer than he wanted".

At the press conference, Mr Bernanke declined to comment on his personal plans.

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