Fed leaves door open on asset tapering

The US Federal Reserve yesterday said the world's largest economy was still expanding at a moderate pace, suggesting a slowing of asset purchases in December or January was still a possibility.

The rate-setting Federal Open Market Committee made no changes to policy at its October meeting, keeping its asset purchases steady at $85 billion a month, but the statement implied it did not see a lot of damage from the government shutdown earlier this month.

Although markets have assumed the Fed will not “taper” its asset purchases until March, the statement implied it could still slow the programme earlier than that – perhaps as early as its December meeting – if the economic data justified it.

The Fed surprised markets in September by choosing to keep purchases on hold. That prompted a global rally in risky assets and big fall in market interest rates, which had risen after Fed communications in June and July suggested it was close to a taper.

Scrambled data
Combined with the effects of the shutdown – which has scrambled the data for October – markets have assumed the September decision meant the Fed was automatically on hold for some months. But October's statement suggests that is not necessarily correct.

In the most notable change in the statement, the Fed eliminated a sentence from September saying that tighter financial conditions – Fed code for higher market interest rates – could lead to a slower improvement in the economy. Scrapping the sentence suggests it is now comfortable with interest rates.

It also kept September’s language that the economy was expanding at a “moderate” pace, choosing not to downgrade it to “modest”, although it noted the housing sector had slowed somewhat in recent months.

However, the Fed pointedly said that its judgment was based on “available data”, indicating that it could yet change as more detailed information for October becomes available.

The Fed board voted for the decision by a majority of 9-1. Esther George, the president of the Kansas City Fed, dissented because she was concerned about the risk of future economic and financial imbalances. – (Copyright The Financial Times Limited 2013)