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The United States Federal Reserve Cuts Back on Quantitative Easing Again

Last night, the Federal Open Market Committee (FOMC) – a committee within the US Federal Reserve – announced that it will cut back again on quantitative easing (paring an additional US$10 billion in bond purchases per month) as the American economy slowly strengthens, but will keep the federal funds target range between 0% and 0.25%.

The federal funds rate is the interest rate at which large American financial institutions lend and borrow money from their balances with the Federal Reserve, which affects the interest rates for all loans. By keeping the federal funds rate low, the Federal Reserve aims to promote borrowing money and discourage saving it, a recipe for increased economic activity.

Analysts had expected the target range to remain steady at next to nothing, but the decision to taper off mortgage-backed and Treasury securities was less set in stone. According to the announcement, the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions” pushed the Committee to its newest tapering resolution, which will put the Fed’s bond buying at $65 billion per month.

The market doesn’t seem to favour the move as the two major American stock market indexes, S&P 500 Index and the Dow Jones Industrial Average, dropped by 1% and 1.2% respectively, last night.

As of the time of writing at 9:55am today, Asian markets had also suffered as the Straits Times Index (SGX: ^STI) here in Singapore is down by 1.1% to 3,014 points while the Nikkei 225 in Japan and Hang Seng Index in Hong Kong have both declined more seriously by 3.1% and 1.4% respectively.

The US Fed’s latest move mimics the Committee’s December decision as it chips another US$5 billion off both mortgage-backed and Treasury securities, putting monthly purchases at $30 billion and $35 billion, respectively.

Looking ahead, the Fed reiterated that a “highly accommodative” policy will remain appropriate for a “considerable time,” even after the recovery improves and quantitative easing ends.

It also affirmed that it doesn’t expect to increase interest rates until the unemployment ratein the USA drops below 6.5%, and perhaps not even then, depending on other economic considerations. The current unemployment rate in the world’s largest economy stands at 6.7%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Justin Loiseau and first published on fool.com It has been edited for fool.sg.

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