US to commence tapering its quantitative easing strategy in January

19th December 2013

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The US Federal Reserve will start easing back its massive quantitative easing programme (QE) from the start of 2014 on the back of a stronger economic outlook writes Philip Scott.

The central bank of the world’s largest economy will reduce its $85bn-a-month bond buying strategy to $75bn in January and thereafter continue to lower it as long as the economic environment continues to further improve.

QE, which essentially boils down to pumping cash into the economy, was initially put in place in a bid to bolster the US economic recovery in the wake of the financial crisis which erupted in 2008.

But recently economic activity and job numbers have been steadily improving. Data released in November showed that the US economy rose at a faster than anticipated annual rate of 2.8% between July and the end of September, up from 2.5% in the previous three months.

In a statement the US central bank said: “Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace.

“Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.

“Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

Markets globally have been uneasy ever since the Federal Reserve Chairman Ben Bernanke first hinted that a reduction was on the cards back in May this year but generally they appear to have reacted benignly to the news. In the UK, the FTSE 100 was up by more than 1% in early morning trading.

Asian markets also appear to have taken the news in their stride while the US market had also made gains by the closing bell. The S&P 500 ended a busy session 1.66% higher, lifting the index to a new all-time high.

The move however has been cushioned by the Fed’s assertion that zero interest rates will remain in place for sometime yet and that QE could be pushed back up if need be.

Commenting on the Fed’s move, J.P. Morgan Asset Management fund manager Tony Lanning says: “The decision to begin the tapering process in January was also accompanied, we think, more importantly by a decision to move expectations away from a 6.5% unemployment rates being the catalyst to the Fed raising interest rates.

“We believe this should now allow the markets to begin to re-focus on fundamentals which we feel continue to improve albeit slowly. The decision to begin to withdraw the medicine should give markets comfort that the patient is indeed recovering and that the economic recovery is real.

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