US policymakers rally behind tapering as Yellen era begins

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Federal Reserve policymakers trimmed bond buying for a second consecutive meeting this week, uniting behind a strategy of gradual withdrawal from chairman Ben Bernanke’s unprecedented easing policy as Janet Yellen prepares to succeed him.

The Federal Open Market Committee (FOMC) said on Wednesday that it would cut monthly bond purchases by $10 billion (R111bn) to $65bn, citing labour market indicators that “were mixed but on balance showed further improvement” and economic growth that had “picked up in recent quarters”.

It was the first meeting without a dissenting vote since June 2011, showing the tapering strategy had brought together policymakers concerned that the Fed’s record $4.1 trillion balance sheet risks causing asset price bubbles with those who, like vice-chairman Yellen, say more needs to be done to reduce unemployment.

“As we transition from Bernanke to Yellen, she’s in a pretty good place in terms of holding together the centre of the committee,” Stephen Stanley, the chief economist for Pierpont Securities, said. “It should be relatively easy to hold together a pretty wide consensus.”

Policymakers pressed on with a reduction in the purchases, put in place to speed up a recovery from the worst recession since the Great Depression, even after payroll growth slowed last month and amid a rout in emerging market currencies.

The Fed left unchanged its statement that it would probably hold its target interest rate near zero “well past the time” that unemployment fell below 6.5 percent, “especially if projected inflation” remained below the committee’s longer-run goal of 2 percent. US stocks remained lower and treasuries gained.

“The Fed is staying the course,” Guy Berger, an economist at RBS Securities, said. “The hurdle for backing away from the implicit stair-step taper that they’ve suggested, which we view as roughly $10bn a month, and winding down the programme in September, is pretty high.”

The Standard & Poor’s 500 index extended losses after release of the statement, falling 1 percent to close at 1 774.20 points in New York on Wednesday. The yield on the 10-year treasury note declined 0.07 percentage points, to 2.68 percent, as investors sought a haven from emerging market turmoil. The benchmark note yields rose 6 basis points to 2.89 percent on December 18 last year after the FOMC announced the first cut to monthly purchases.

The FOMC statement “introduced a little bit more clarity and certainty to markets on the direction of the Fed”, Heather Loomis, the West Coast director of fixed income for JPMorgan Private Bank in San Francisco, said. “It would have been confusing if the noise in emerging markets caused them to change course.”

Treasuries gained earlier on Wednesday as South Africa’s central bank joined Turkey in raising its benchmark interest rate in moves that failed to reassure investors, while Russia’s rouble extended its slump to 13 days and Hungary’s forint weakened.

The S&P 500 has fallen 4 percent this year, driven lower by a rout in emerging market currencies that helped fuel a $1.87 trillion sell-off in global stocks in the week to Monday.

The Fed repeated that inflation “persistently below its 2 percent objective could pose risks to economic performance and it is monitoring inflation developments carefully”.

The central bank’s preferred gauge of consumer prices rose an annual 0.9 percent in November last year and has not exceeded the Fed’s goal since March 2012.

Bond purchases would be divided between $35bn in treasuries and $30bn in mortgage debt beginning next month, the Fed said. It repeated that purchases were not “on a preset course”.

The Fed’s decisions over the previous 20 meetings have met with dissent, either from those who opposed the Fed’s stimulus policies, or those who said the central bank should do more to boost the economy.

Seven regional Fed bank presidents have dissented since 2011. The Richmond Fed’s Jeffrey Lacker objected to every decision in 2012. Kansas City’s Esther George objected all of last year, until the Fed announced its first tapering last month – a decision that drew an objection from Boston’s Eric Rosengren, who believed the Fed was cutting back too soon. Rosengren later withdrew his opposition, saying in an interview this month that he would support a gradual tapering, even though he would have preferred to begin later.

The decision last month was accompanied by a stronger commitment to keeping interest rates near zero until unemployment declines, an effort to keep long-term interest rates from rising as the Fed curtails stimulus.

“To the extent that there are doves who had misgivings about tapering, they were probably quelled to a great degree that the forward guidance was strengthened,” Stanley said.

Fed district bank presidents rotate voting on monetary policy each year, with Cleveland’s Sandra Pianalto, Philadelphia’s Charles Plosser, Dallas’s Richard Fisher and Minneapolis’s Narayana Kocherlakota voting this year. Fed governors hold permanent votes, as does the president of the Federal Reserve Bank of New York, who serves as FOMC vice-chairman.

Economists surveyed had forecast the Fed would taper purchases by $10bn on Wednesday. The FOMC will continue tapering at each meeting and end the programme no later than December, according to the January 10 survey.

Bernanke outlined the strategy for tapering at a press conference on December 18 last year, the last of his eight-year tenure. His term ends today, and Yellen takes over on Saturday. “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do probably at each meeting a measured reduction,” he said.

Since then, a Labor Department report showed payrolls rose last month at the slowest pace in almost three years, partly reflecting the impact of bad weather. The unemployment rate nevertheless declined to 6.7 percent, a five-year low, as people left the labour force.

Other data have shown continued strength in an economy that expanded at a 4.1 percent annual pace in the third quarter of 2013, the most in almost two years.

Retail sales climbed for the ninth consecutive month in December as frigid temperatures prodded Americans to buy discounted winter clothing and shop online for the holidays. Industrial production last month capped the strongest quarter since 2010. – Bloomberg


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