US Fed trims bond purchase further

Janet Yellen-led US Fed Reserve decided to continue the path of rewinding its quantitative easing with second cut in bond purchase in as many months. US Fed on Wednesday cut its monthly bond purchase programme from $55 billion to $45 billion.

The Fed Reserve has now almost halved its bond purchase plan in the last five months alone.

The US monetary authority said that information received since the last meeting of Federal Open Market Committee (FOMC) in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.

“Labour market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing,” it noted adding that inflation has been running below its longer-run objective, but longer-term inflation expectations have remained stable.

The FOMC said there is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions since the inception of the current asset purchase program, it decided to make a further measured reduction in the pace of its asset purchases.

Beginning in May, it will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month.

It noted that its sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with its dual mandate.

The US Fed said if incoming information broadly supports the FOMC’s expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

But it clarified that asset purchases are not on a ‘preset course’, and the FOMC’s decisions about their pace will remain contingent on its outlook for the labour market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

Earlier, last month, US Federal Reserve had hinted will probably end its bond-buying program by autumn, and could start raising interest rates by next spring.

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