Edited by Vani Rao
Slashes GDP projections to between 2.1% and 2.3% from the earlier 2.9%
In our follow-up to the Federal Open Market Committee’s (FOMC) two-day meeting on June 17 and 18, 2014, the committee wrapped up its meeting by trimming its earlier optimistic growth forecasts while hinting that interest rates may increase sooner than expected. As economists had earlier expected, the FOMC said that it will reduce the pace of its monthly bond buying by another $10 billion to $35 billion in July, including purchases of mortgage-backed securities and long-term Treasury bonds. The announcement is in line with the committee’s earlier guidance. The Fed has been reducing its asset purchases by $10 billion in every FOMC meeting since December, as per which the tapering should end by December 2014.
On the other hand, if the labor market conditions improve and inflation moves closer to the long-term goal of 2%, “the committee will likely reduce the pace of asset purchases in further measured steps at future meetings,” according to an FOMC statement from the Fed. In its policy statement, the Fed said that it would continue to reinvest the proceeds of its asset holdings as they mature.
The central bank committee also slashed its FY2014 GDP projections to between 2.1% and 2.3% from the earlier 2.9%, keeping with the slowdown in Q1 after a severe winter pulled to a halt activity in major parts of the country. While reducing its current pace of asset purchasing, the Fed will maintain its current target range for the federal funds rate.
The markets reacted positively to today’s FOMC meeting, as the S&P 500 surged ahead 15 points and closed at a record high 1,956.98, while the Dow Jones Industrial Average advanced 98.13 points to 16,906.62. The Nasdaq also moved ahead 25.6 points, closing at 4,362.84.
Precious metals may lose luster
However, the FOMC announcement could result in a dip in gold and silver prices in the near term. With the possible ending of the Fed’s stimulus program in December and the expected rise in benchmark interest rates about six months later, people would no longer find it appealing to hold onto previous metals. Hence, a near probability of a hike in interest rates could see gold losing its luster. The graph below shows the gold price fluctuations in June 2014.
Yellen keeps up faith in improving job market
At an afternoon news conference after the FOMC ended a two-day policy meeting, 2014, Fed Chair Janet Yellen reiterated that “the US economy is still not healthy enough to grow at a consistently strong pace without the Fed’s help”. Yellen echoed the FOMC’s stance when she stated that despite a steadily improving job market and signs of inflation, the Fed sees no need to raise short-term interest rates from record lows anytime soon. When she was further quizzed about the timing of the interest rate hikes, Yellen simply stated that it would depend on how the economy progresses in the coming months.
Heartening was the fact that Yellen kept faith in the economic recovery in the coming quarters owing mainly to the resilient household spending and an improving jobs market. Although the FOMC slashed growth forecasts for 2014, Yellen said that was merely a result of “transitory” factors like severe winter, and that a rebound was in the offing. The Fed Chair stated that the “dual mandate” of reaching price stability and maximum employment will not mean immediate changes in the FOMC’s policy strategy. “These discussions are in no way intended to signal any imminent change in the stance of monetary policy. Rather, they represent prudent planning on the part of the committee and reflect the committee’s intention to communicate its plans to the public well before the first steps in normalizing policy become appropriate.” Yellen said in the press conference.