Federal Reserve to end quantitative easing

The US Federal Reserve is shifting its focus to its first interest rate rise after ending an era of unprecedented asset purchases.

In a marked change of language, the rate-setting Federal Open Market Committee highlighted an improvement in the US labour market. Dropping its previous view that there was "significant underutilisation" of labour resources it said this was "gradually diminishing".

This signals a big shift in the Fed’s horizons away from aggressive monetary stimulus via its third round of asset purchases, or quantitative easing, and towards the need for an eventual rise in interest rates from their current level close to zero.

The dollar surged higher after the statement was released as investors started to bet on an interest rate increase sooner than previously expected.

Dissenter

The Fed voted for the statement by a majority of 9-1. In a sign of how much tougher the statement was, the dissenter was not one of the “hawks”, but Narayana Kocherlakota of the Minneapolis Fed, a “dove” who wanted the Fed to commit to a longer period of low rates.

The statement shows the Fed has shrugged off a recent bout of market turmoil and concerns about the global economy. It noted, however, that “market-based measures of inflation expectations have declined somewhat”, a sign of continued concern.

The central bank kept its forecast of low interest rates for a “considerable time”, but explicitly tied the start of that period to this month, and inserted a get out clause to allow for earlier rate rises if the economy improves faster than expected.

‘Faster progess’

“If incoming information indicates faster progress toward the committee’s employment and inflation objectives than the committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated,” says the statement. “Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

The Fed completed the taper of its last $15 billion-a-month in asset purchases, and will keep its balance sheet stable from now on.

The Fed began its third round of quantitative easing in September 2012 when it pledged to buy $85 billion of long-term assets every month until there was a substantial improvement in the jobs market. Since then, unemployment has fallen from 8.1 per cent to 5.9 per cent. – (Copyright The Financial Times Ltd 2014/Reuters)