US Fed cuts its stimulus plan further, says economy is improving

29 January 2014 20:58 Source:ICIS News

WASHINGTON (ICIS)--The US Federal Reserve Board on Wednesday further reduced its long-standing stimulus programme, cutting to $65bn its purchases of Treasury securities and mortgage-backed investments, citing the improving economy.

The Fed’s Federal Open Markets Committee (FOMC) said in a statement that US economic activity has picked up in recent quarters, noting that household spending and business outlays have advanced more quickly in recent months.

While the official federal unemployment rate has declined to less than 7%, the committee said that the jobless rate remains elevated.

The Fed - the US central bank - also noted that while the US housing sector is in recovery, its pace of expansion has slowed recently and that federal fiscal policy, meaning the government’s budget planning, is “restraining economic growth”.

But the committee said that despite existing headwinds, “economic activity will expand at a moderate pace and the unemployment rate will gradually decline”.

Because of the improving economic picture, the Fed said that it would continue to wind down its financial stimulus programme, reducing monthly purchases of federal securities and mortgage-based investments by a combined $10bn.

This marks the second reduction in the Fed’s quantitative easing policy by $10bn, reducing the overall total from its initial monthly level of $85bn to $65bn.

Although the pace of stimulus intervention is being reduced, the Fed said that its continuing purchase of Treasury notes and mortgage-backed securities “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative”.

That, said the committee, “should promote a stronger economic recovery and help to ensure that inflation, over time, is consistent with the committee’s mandate”. The Fed likes to see annual US inflation rates of around 2%, but the pace of price increases at the retail level has been running generally below that level.

Lastly, the Fed said that it would maintain its long-standing, rock-bottom federal funds interest rate at 0% to 0.25% and it does not anticipate raising the rate until the US jobless rate falls below 6.5% and perhaps even after that benchmark is reached.

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