Published On: Thu, Jan 30th, 2014

Federal Reserve tapers by another $10 billion for the second straight month

In Ben Bernanke’s final meeting as chairman of the Federal Reserve Bank as expected he continued “tapering” of the bond buying program which had been implemented to stimulate the US economy. The tapering in this case was $10 billion, bringing the bond buying for February down to $65 billion compared to $75 billion in January.

Federal Reserve Tapers Bond Buying Program

This amount was widely expected, and it is thought that it will not impact the US economy too much particularly as the programme is still a big number and very stimulative. The Feds have been carefully balancing the amount of stimulation, as to withdraw funds too quickly might send the US economy into another decline; however it is plainly obvious that the current level of stimulation could not be continued indefinitely.

The stimulation used to be $85 billion per month, but this amount was tapered down to $75 billion last December, following several months of warning that it would happen. The $85 billion was started in September 2012. Some experts were surprised that the Feds did not seem to pay attention to the recent crisis in emerging markets, which some have blamed on Fed tapering. The further tapering is further aggravating the pullback from emerging markets currencies such as the Argentinian peso, Turkish lira and South African rand which have taken a hammering.  But it seems that the only concern of the Federal Reserve is to keep a stable US economy, irrespective of side effects on other nations and we will need to see whether this is just a slight pullback from a bull market or a sign of further things to come. The emerging markets crisis suggests that investors are wary at a time when the US yield curve is flattening and a flattening curve could be sign of an economic slowdown, as opposed to the acceleration that is expected.

Analysts were concerned that the US jobs report in December was weak, showing 74,000 jobs added, much less than the average 200,000 jobs added in prior months. However, the unemployment figures were still good, edging down to 6.7% from 7%, which allowed the Fed to continue its reduction in spending. 6.5% has been set as a notional value at which the Fed will consider raising interest rates, currently near zero as they have been since the crisis of 2008. Any increase in interest rates will further impact the emerging markets, as it will attract US investment and withdraw funds from other countries.

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About the Author

- Robert is a private trader with over 15 years experience trading the financial markets.