Fed to cut bond-buying by $10 bn from January, keep rate unchanged

The US Federal Reserved yesterday announced a toned-down bond-buying programme, citing an uptick in the underlying strength of the broader economy as reflected in an improvement in economic activity and labour market conditions.

Beginning January, the Federal Open Market Committee (FOMC) will limit monthly purchases of agency mortgage-backed securities to $35 billion against the present $40 billion per month, and the purchase of longer-term Treasury securities to $40 billion per month against the present level of $45 billion per month.

This would limit total central bank monetary support to the US economy to $75 billion, $10 billion lower than the current level of $85 billion.

The FOMC also decided to keep the target rate for federal funds of 0 to 1/4 per cent unchanged as long as unemployment rate remains above 6-1/2 per cent. It also projected medium term inflation for one and two years to be not more than a half a percentage point above the FOMC's 2 per cent longer-run goal.

The FOMC, however, will continue with its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

US Federal Reserve chairman Ben Bernanke, whose term ends on 31 January has blamed the slow slow recovery of the US from Recession on the extensive damage from the sub-prime mortgage bust, and Europe's debt troubles, which slowed global economy recovery at a critical time.

The committee, according to Fed, has a sizable and still-increasing holdings of longer-term securities that are more than enough to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make financial markets more accommodative.

This, in turn, would promote stronger economic recovery and help to ensure that inflation, over time, is consistent with growth objectives.

Once the labour market improves and inflation moves back to the Fed's long-term objective, the FOMC is likely to reduce the pace of asset purchases in the future.

While asset purchases are not on a preset course, and the FOMC's decisions about quantitative easing are contingent on the outlook for the labour market and inflation levels as well as its assessment of the likely efficacy and costs of such purchases, Fed said it would closely monitor the economic and financial indicators before announcing any move.

To committee, however, was of the view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase programme ends and the economic recovery strengthens.

Once the committee decides to begin removing policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent, Fed said.

The Fed's asset purchase programme, started some 15 months ago, has left it with a holding of roughly $4 trillion in bonds. But the monetary expansion, the riskiest monetary policy experiment ever, helped improve economic growth, labour market and price levels in the world's largest economy.