x Abu Dhabi, UAEWednesday 17 January 2018

Fed to wind down US economic stimulus

America’s central bank last night announced it will begin to wind down the economic stimulus it launched amid the 2008 financial crisis.

WASHINGTON // America’s central bank tonight began to wind down the economic stimulus it launched amid the 2008 financial crisis.

The Federal Reserve is to cut its monthly bond purchases from $85 billion (Dh312bn) to $75bn, in what amounts to the beginning of the end of the unprecedented support that Fed chairman Ben Bernanke had put in place to help the US economy recover from the worst recession since the 1930s.

It trimmed equally from mortgage and Treasury bonds.

The moves, which could come as a surprise to many investors, signalled better prospects for the US economy and labour market and mark a historic turning point for the largest monetary policy experiment ever.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Federal Open Market Committee said at the end of a two-day meeting in Washington.

Mr Bernanke, in the final weeks of his eight-year tenure, is curtailing the purchases that swelled the Fed’s balance sheet to almost $4 trillion as he sought to put millions of jobless Americans back to work.

“Fundamentally, the economy is in a better place,” Priya Misra, head of US rates strategy at Bank of America in New York, said before the Fed’s statement.

“Even if things are getting better, they don’t want to take away accommodation too fast.” Bank of America Merrill Lynch is one of the 21 primary dealers that trade with the central bank.

The Fed’s asset purchase programme, a centrepiece of its crisis-era policy, has left it holding about $4 trillion of bonds, and the path it must follow in dialling it down is rife with numerous risks, including the possibility of higher-than-targeted interest rates and a loss of investor confidence.

In a move probably meant to discourage any sharp market reaction that could undercut the recovery, the central bank also said it “likely will be appropriate” to keep rates near zero “well past the time” that the jobless rate falls below 6.5 per cent.

It was a noteworthy tweak to a previous commitment to keep benchmark credit costs steady at least until the jobless rate hit 6.5 per cent. The rate stood at 7.0 per cent in November, a five-year low.

The Fed’s latest so-called quantitative easing programme was launched 15 months ago to kick-start hiring and growth in an economy that was recovering only slowly from the Great Recession.

The Fed’s first QE programme was launched in the midst of the 2008 financial crisis.

* Bloomberg News and Reuters