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Published On: Wed, Jun 19th, 2013

Federal Reserve to begin winding down bond purchasing program

The Federal Reserve and its chairman, Ben Bernanke, today announced the results of its June meeting. While there were many items on the agenda, one stood head and shoulders above the rest – the continuation and potential death of the central banks $85 billion a month on purchasing program. Investors have been awaiting the results of this meeting since May 22nd, when Ben Bernanke made some alarming public comments that suggested that the monetary stimulus package may be coming towards the end of its life.

The comments played havoc on indices across the globe as the Nikkei 225 changed overnight from a rapidly growing market to one of almost unparalleled volatility. Additionally the FTSE 100 has declined by 7.2 percent since Bernanke’s comments, while the S&P 500 has declined by 14 percent.

Today the Fed’s chairman said that it would be “appropriate to moderate the monthly pace of purchases later this year” if the US economy continues to show solid signs of economic growth. While there was no date set in stone, two time frames were mentioned; within the next six month’s or “mid-2014”. Mr Bernanke was quick to point out that this was not to be the ending of the monetary stimulus but rather the beginning of a process which would see a decline in the amount being spent on assets at a steady rate over an undetermined period of time.

Many analysts feel that the Federal Reserve’s chairman was forced into making a comment on the situation after his comments last month caused so much uncertainty in the markets. Since the beginning of his tenure as the head of the world’s largest central bank he has always tried to be as transparent as possible with the press and the general public, however after seeing the effects of his words on the prices stocks and commodities, he realized that he was having an undesired effect on the stability of the markets. With that in mind it is understandable why the press conference was somewhat cagey.

However, Bernanke did give us some vital clues as to what the Federal Reserve consider to be “solid economic growth”. He said that he expected the tapering to begin when unemployment remained steady at a rate of around 7 percent “with solid economic growth supporting further job gains”. The last big comment from the Fed chairman was “our policy is in no way predetermined and will depend on the incoming data and the outlook”, which while fairly obvious, needed to be stated to help settle the nerves of investors not only in New York but also in London and Tokyo.

The only other news to come out of the meeting was the suggestion that the Federal Reserve may lower its 6.5 percent unemployment policy for further raising of interest rates and the retraction of the central bank’s plans to sell mortgage backed securities when they inevitably turn off the $85 billion a month tap to the US economy.

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About the Author

- Gregory previously worked for a leading financial news publication and is now assistant news editor of financialtrading.com.

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