America’s central bank brought its multi-trillion dollar quantitative easing (QE) scheme to an end last night, and signalled it could put up interest rates earlier than previously thought.
In a statement, the Federal Reserve said, as widely expected, that its asset-purchase programme would cease this month in light of what it described as the “sufficient underlying strength” of the US recovery. The central bank, chaired by Janet Yellen, also seemed to edge away from its dovish position over the likely timing of the next rate rise.
Although the central bank pledged to keep interest rates at their record lows for a “considerable time” in order to entrench the US economy’s recovery, it also noted that labour-market slack was “gradually diminishing” and failed to repeat its previous view that there is “significant underutilisation” of labour resources.
“The dropping of “significant” could be, well... significant,” said Paul Ashworth of Capital Economics. “This is not as dovish as the market had expected,” said Richard Cochinos of Citi.
The statement sent the dollar up sharply against the pound, rising 0.7 per cent to 62p. It rose by a similar amount against the euro to 79c.
The price of short-term US futures contracts fell, signalling market expectations of an earlier rate rise, while two-year Treasury bill yields experienced their biggest, one-day jump since early 2011. Traders brought forward their bets on the first rate rise from October 2015 to September 2015.
One member of the Fed committee, Narayan Kocherlakota, dissented from the decision to end QE, citing weak market-inflation expectations.
But on prices the Fed statement said it now saw less likelihood inflation would run persistently below the central bank’s 2 per cent target. US core consumer-price inflation is currently 1.7 per cent.
There was also little evidence to suggest the Fed is concerned that recent turbulence in global equity markets could impact growth.
The Federal Reserve started buying US government bonds and bundles of mortgage and other consumer-loan securities during the global financial crisis in 2008. The purchases have lifted the central bank’s balance from around $1trn (£624bn) dollars to $4.5trn over the past six years.
In September US unemployment fell to 5.9 per cent, down from a peak of 10 per cent in 2009, and data to be released today is expected to show that the US economy grew at an annual pace of 3 per cent in the third quarter of the year.
However, the Fed did stress that interest rates were unlikely to return to pre-crisis levels anytime soon.
“Even after employment and inflation are near mandate-consistent levels, economic conditions may warrant keeping the target federal funds rate below levels the committee views as normal,” it said.Reuse content