The Federal Reserve has announced that it will start to withdraw its stimulus measures from January. The asset purchase scheme which sees the Federal Reserve commissioning the purchase of $85 billion worth of securities each month will be dialled back by $10 billion per month.
Many analysts had expected that the winding-down of the stimulus package would have been underway by the autumn, so the fact that a time for easing of the stimulus measures has come as a surprise to nobody. However, the Federal Reserve said that the trigger for the pull-back would be when US unemployment had fallen to below the 6.5% measure. In the end, they have pre-empted their forward guidance since unemployment is at 7% in the USA. In the Fed’s opinion, general economic factors are now ripe for the process of “tapering” to start. The reduction will be equally split between two components of the asset purchase programme with Treasury bond purchases cut back to $40 billion from $45 billion and mortgage-backed securities purchases declining from $40 billion to $35 billion per month – still a huge monthly investment.
The Federal Reserve expects unemployment to dip from its current level to 6.3% in the course of 2014 and notes that the US economy is improving more rapidly than it had anticipated.
Announcing the decision, outgoing Federal Reserve Chairman Ben Bernanke noted: "If incoming data broadly support the committee's support for employment we will likely reduce the pace of committee's purchases in further steps at future meeting. Continued progress is by no means certain. Adjustments will be deliberate and dependent on incoming information."
In contrast to what many had expected, stock markets rose on the news of the New Year Taper with the Dow Jones up by 1.8% and the S&P 500 up by 1%. This has been attributed to the scale of the reduction which drops support by about 12% in this first instance, but then the whole concept of the Taper was that withdrawal of support would be a measured and proportionate affair with note being taken of how steps were affecting the economy.