Yesterday, we reported that the IMF had slashed its projection for US full-year growth for 2014. The US Federal Reserve has taken a similar step, cutting its own growth projection from between 2.8 and 3%, to between 2.1 and 2.3%, citing the same reason as the IMF for the reduction; the bad winter.
The Fed has decided to continue with the “Taper”, reducing its monthly asset purchase programme by a further $10 billion to stand at $35 billion, down from a peak monthly value of $85 billion. It is anticipated that the “Taper” will conclude in the course of this year with the eventual ending of the asset purchase programme, but the Federal Reserve Chairman, Janet Yellen, again stressed that there was no pre-set timetable and that further reductions would be dependent upon the condition of the US economy. Most analysts are predicting that the asset purchase programme will have concluded by the autumn of this year, however.
Despite the reduction in the growth forecast, the Fed was at pains to point out that economic activity had rebounded since the end of the winter period. The asset purchase programme has been designed to keep long-term borrowing cost for the US government low, provide support by purchasing mortgage backed securities and boost liquidity in the economy through the commissions paid to the financial sector for purchasing the assets on behalf of the government (the appropriate phrase being “nice work if you can get it”). Clearly enough, the asset purchase programme has been a highly accommodative and unusual monetary policy which must end if the economic cycle is to normailse. With such a large injection of cash into the economy, the Fed could not risk going “cold turkey” with reduction of the support it was giving the economy (not least because it bled out into other economies and stock markets around the world) hence the “Taper”.
Unlike the UK’s Bank of England, the Fed has been keen to suggest that its ultra-low interest policy will remain for the foreseeable future. Most pundits take this to mean that rates will remain where they are for at least another year whereas in the UK there is considerable speculation that rates could edge up before the end of the year.