US Fed Bids Adieu to Bernanke; to Trim Bond Purchases by Another $10 billion

Edited by Vani Rao

Central band sticks to plan despite market jitters

The US Federal Reserve, at its policy meeting on Wednesday, 29 January 2014, has decided to taper bond purchases by another $10 billion, putting aside weak job growth in December and market fears on the outcome of the decision. It was Bernanke’s final meeting, and the first without dissent since June 2011, after which he will pass on the baton to Vice Chair Janet Yellen on Friday, according to Reuters.

shutterstock_70420771Before joining the Fed, Bernanke was a professor and leading scholar of the Great Depression. During his eight-year tenure with the central bank, Bernanke was instrumental in building a $4-trillion balance sheet and keeping interest rates near zero for more than five years. He also spearheaded immense efforts to pull the US economy from its worst downturn in decades.

Earlier, investors had speculated that the Fed might not taper its stimulus program given the fluctuating market conditions in the emerging market. However, the Fed stuck to its plans to taper the bond purchases, apart from focusing on its main agenda to keep interest rates low for at least the third quarter of 2015, as decided in its earlier policy meeting.

Reacting to the Fed’s decision, major US stock indexes closed down more than 1%, while yields on the benchmark 10-year Treasury note hit the lowest level since late October 2013. Moreover, the dollar rose against the euro, but remained steady against other currencies. It is expected that the US economy may face many hurdles before the Fed finally does away with the asset-purchase program later this year.

Focused on the home front

On Wednesday, the Fed stated that it would buy $65 billion in bonds per month starting February 2014, down from the current level of $75 billion. Beginning February, the Fed stated that it will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month. In addition, it will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month as compared to the current level of $40 billion per month. Most importantly, the Fed needs to balance the delicate act of keeping interest rates near zero until the US unemployment rate, now at 6.7%, improves to below 6.5%, especially if inflation remains below the target of 2%.

Meanwhile, the Fed’s decision will have no bearing on the sell-off in the emerging markets, which has had a negative impact on the US stocks over the past week. Markets in Turkey and Argentina, which are faced with large current account deficits, have suffered steep losses because of a possible scenario of lesser monetary stimulus from the US Government. These currencies and stocks plummeted after the Fed’s announcement, offsetting aggressive interest rate hikes by Turkey and South Africa.

Finally, it remains to be seen how Janet Yellen, who will chair her first policy meeting on March 18-19, will bring the purchases to a halt later this year.

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