On December 18 2013, at his final press conference as chairman of the Federal Reserve, Ben Bernanke announced the first reduction in the pace of asset purchases in the US.
The monthly amount was reduced by $10bn (£6.1bn), to $75bn, with the reduction split evenly between US Treasuries and mortgage-backed securities and was put into place at the start of this year, rather than being an immediate alteration in policy. The Fed also took steps to strengthen its forward guidance, saying that interest rates are likely to stay near zero “well past the time” that the unemployment rate falls below 6.5 per cent. Mr Bernanke emphasised that the 6.5 per cent level was a threshold, not a trigger, indicating that an immediate change in policy may not take place when this level is reached.
Although the unemployment threshold remains unchanged, its importance is now diminished, indicating that US policymakers no longer prefer to be bound by a single economic measurement.
The Fed now expects lower short-term interest rates, with rates of 0.75 per cent at the end of 2015 and 1.75 per cent by the end of 2016, as opposed to the September estimate of 1 per cent and 2 per cent respectively.
Further reductions in the pace of asset purchases were made conditional upon continued strength in the US job market and progress in inflation increases. Mr Bernanke also reiterated that the US central bank retained the ability to either increase or decrease the rate of reduction in purchases.
With a change in Federal Reserve leadership in the offing, Mr Bernanke endeavoured to stress that his successor, Janet Yellen, agreed with the decision. At the current pace of reductions, asset purchases will not end until late in 2014, but it remains to be seen whether Ms Yellen will alter this.
Equity markets reacted positively to the news, rising strongly in the wake of the decision, while Treasury bond prices increased in expectation that the reduction in the volume of asset purchases will be gradual.
The outcome of the meeting is positive, reinforcing the positive view on the outlook for the global economy in 2014. The decision removes much of the uncertainty surrounding the direction of monetary policy in the US and shifts the focus back to the health of the US economy. It signalled that further reductions in the scale of asset purchases would be conducted at a measured pace, reassuring the market that the Fed will not act hastily.
Monetary policy remains supportive of global growth. Equity earnings expectations remain ahead of reality, but downgrades to earnings forecasts are unlikely to prevent further rises in this asset class, as investors are likely to remain comforted by the supportive stance of central banks.
Andrew Cole is investment director of the global multi-asset group at Baring Asset Management
JANET YELLEN
WILL SHE MAKE A DIFFERENCE?
Ted Scott, director of global strategy, F&C Investments
The prospects are that monetary policy will remain broadly unchanged unless there is a significant improvement in economic data. Already. Ms Yellen has set out her dovish credentials and stated that the economy is operating well below its potential. US economic data has been mixed recently and the rise in bond yields has contributed to an increase in mortgage rates that has put a brake on the expansion of the housing market. Any hint that tapering might start shortly will lead to a further increase in bond yields and mortgage rates, which the Fed will be keen to avoid.
