Today the Fed ended QE and made its forward guidance on rates more data-dependent. The central bank turned slightly more hawkish in its assessment of the economy by removing the characterization of labour market underutilization as “significant.” We stick to our expectation for the first Fed rate hike in mid-2015.
As widely expected, the Fed today announced the end of its asset purchase programme, with a USD 15bn reduction in the pace of purchases, ten months after it began the tapering process.
The Fed repeated its promise to keep rates low for a “considerable period” but made its forward guidance on rates more clearly data dependent, saying it could either move forward or backward the start date of an eventual rate hike depending on the economy’s progress toward the twin goals of a 2% inflation target and maximum sustainable employment.
On the economy, the Fed turned slightly more hawkish by removing the characterization of labour market underutilization as “significant.” Pointing to “solid job gains” and a falling unemployment rate, the Fed said a range of indicators suggest that labour market slack is “gradually diminishing.” Moreover, the Fed dropped the reference to fiscal policy as a restraint on economic growth.
On inflation, the Fed noted that “inflation in the near-term likely will likely be held down by lower energy prices and other factors”, but it did not change its view that “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year”.
The Fed did not sound overly concerned that market-based measures of inflation expectations have softened somewhat, as it also noted that survey-based measures on longer-term inflation expectations have remained stable.
The Fed’s move to a forward guidance that is more clearly data dependent is probably the reason why Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser voted with the majority today. Back in September both Fisher and Plosser objected to the Fed’s pledge to keep interest rates near zero for a “considerable time” after QE ends. The sole dissent today came from the Minneapolis Fed’s Narayana Kocherlakota, who wanted to strengthen the forward guidance on rates and keep the bond-buying programme going at its current level.
An end to QE will not lead to tightening since the Fed plans to roll over maturing assets until after interest rates go up, probably not before mid-2015. We expect the first rate hike in June.
The end of the Fed’s QE is an acknowledgement of the substantial improvement in the outlook for the labour market, as reflected by the decline in the unemployment rate from 8.1% in September 2012, when the Fed’s current QE3 programme was launched, to now 5.9%. As a matter of fact, the unemployment rate is now below the levels seen just prior to the start of QE1 back in late 2008.
Since late 2008 when the Fed started its first QE programme the central bank has accumulated about USD 3,800bn in MBS and Treasury securities, amounting to 22% of today’s GDP. The Fed owns 19% of the outstanding amount of US Treasury securities and 22% of outstanding agency mortgage-backed securities.
Nordea