FOMC MEET - AS EXPECTED, ANOTHER $10 BILLION TAPER
By Ruma Dubey
The scale back in the bond buying came in as expected – Janet Yellen scaled back the bond buying by another $10 billion/month to $35 billion. This is the fifth consecutive meet where $10 billion reduction in bond buying was announced. The continuity, from Bernanke to Yellen, the ‘tradition’ of reducing bond buying by $10 billion per month goes on.
And once again, as expected, there was no change in the interest rate; after all this, as promised by Yellen in the earlier meet, will depend on the progress of both realized as well as expected, towards its objective of maximum employment and 2% inflation. Yellen also went on to reiterate that bond buying tapering will continue as the economy grows stronger. It is widely expected that before the end of 2014, the bond buying would have ended fully.
Fed expects to reduce their asset purchases in “measured” steps; this is what she stated at the ensuing Press Conference – that means we can expect steady cuts of $10 billion at every FOMC meet. . So this means from $35 billion now, it will come down to $25 billion in July and then $15 billion in Sept. Thus in the October FOMC meet, if the Fed cuts $10 billion then it might put off remaining $5 billion for Dec or else, it might end the bond buying completely in October itself. In many ways, October FOMC meet will be significant. But if the Fed goes for a smaller tapering in Oct, then it would mean that interest rate hikes will not come in before 2015.
Highlights of the FOMC meet:
- Bond buying tapered by another $10 billion to $35 billion per month – Yellen warned that bond purchases are not on a preset course.
- No change in interest rate at 0.0% to 0.25% but predicted their target interest rate will be 1.13% at the end of 2015 and 2.5% at end of 2016, higher than previously forecasted.
- Unemployment at the end of 2014 is expected at 6 to 6.4%
- Inflation forecasts unchanged at 1.5% to 1.7% in late 2014, 5.4% to 5.7% by late 2015; expects inflation to gradually move to 2% objective.
- Housing spending seems to be increasing moderately.
- Fed’s unemployment rate forecast slightly lower than in March - current unemployment rate of 6.3% is 0.4% lower than at the time of the March meeting.
- Payrolls have increased four consecutive months by more than 200,000, the first time that’s happened since early 2000
- Jobless rate held at an almost 6-year low of 6.3% in May, down from 6.7% in March.
Yellen once again, like the last time warned, ““One should not look to the dot-plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large.” In simple parlance – just because you are nearing the goal, it does not mean that a rate hike in imminent.
How will Indian markets react to this? Pretty much nonchalant. The FOMC meet had no new surprises, nothing unexpected. All eyes will once again revert back to Iraq, the falling rupee and rising crude prices. Till the geopolitical tension does not get dissipated, the stock markets are expected to remain volatile.
Meanwhile the budget session of Parliament is likely to be convened from July 7 and may go on till July 31. It is stated that we may see first see the pre-Budget Economic Survey in the first week of the session, followed by the Railway Budget and then Union Budget. The Vote-of-Account of UPA ends on 31st July, which means the Modi Govt HAS to present the Budget before July ends. Also, keep an eye on the errant El Nino and the Indian monsoon – that will pretty much dictate all policy actions for the fiscal.