Wednesday, September 18, 2013

Fed holds off tapering, cuts growth outlook

U.S. Federal Reserve chief Ben Bernanke said the central bank decided to hold off on slowing the US$85-billion a month in bond purchases to see more conclusive evidence that the recovery will be sustained, a move that surprised financial markets that were braced for a reduction in the stimulus program.

            The US Federal Reserve has decided in its latest monetary policy to maintain its economic stimulus program (the Quantitative Easing) despite speculation that it would start the tapering process. It had been widely speculated that the central bank would cut back the stimulus package, currently $85bn a month. The Reserve also reduced its growth forecasts for the US economy, cutting the 2013 outlook by 0.3 percentage points to a range of 2.0-2.3 per cent, and lowering the prediction for next year to 2.9-3.1 per cent.
            To give a backdrop to the entire situation, the US embarked on an easy money policy post the 2008 financial crisis. This was called the Quantitative Easing program wherein the Federal Reserve would buy bonds and other assets in order to push more money into the economy, thereby stimulating growth and reducing unemployment.  The most recent strategy, called QE3, had the Fed buying $85 billion of bonds every month.
            With the US economy stabling, and the unemployment estimates reducing to 6% for the year 2015, the US Fed Reserve Chief Ben Bernanke had previously indicated in June that the tapering of the QE program may begin by the end of this year. This had sparked a panicky flow of money out of the emerging markets and back to the US which had adversely affected the emerging economies, including India.
            In his statement today Bernanke said, ‘‘Conditions in the job market today are still far from what all of us would like to see. The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.’’ Another important point is that Mr. Bernanke said a decision on tapering asset purchases depends on economic data, and there is no set timetable. Previously he had indicated that the tapering will begin by the end of this year.
            Now that the QE tapering has been held off, the markets on the whole will be looking towards a revival of sorts. The US Dow Jones rose 1.11% to 15,701.82 and the NASDAQ by1.1% to 3,786.906. The BSE Sensex has already gained 500 points and is at 20,464 points (as of 11:20 AM IST). The Rupee has has come down to 61.95 to the Dollar, down by 1.44 (as of 11:20 AM IST).
All eyes are on the RBI monetary policy expected tomorrow (20th September) where it is expected that Mr. Raghuram Rajan will signal a reversal to a few of the tightening measures the RBI had taken previously.

- Sufiyan Sarguroh
  SIMSREE Finance Forum