In the minutes for December’s Federal Open Market Committee (FOMC), it was revealed that some of the central bank’s policymakers argued QE should be ended by the close of the year if the outlook for employment and the broader economy continues to improve.
The Fed is currently pumping $85bn a month into the US economy through the purchase of longer-term Treasury securities and mortgage-backed securities. With the bank’s commitment to keep interest rates low well into 2015, the market had expected QE to continue through this year and into 2014 at the very least.
According to the statement, “a few members” of the FOMC said the ongoing pace of asset purchases would be warranted until the end of 2013 while “several others” argued for QE to be slowed or to stopped “well before” the end of 2013. One member claimed any more purchases are unnecessary.
“While almost all members thought that the asset purchase programme begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased,” the FOMC reported.
US stock markets fell after the report was published. The Dow Jones, S&P 500 and Nasdaq all ended yesterday’s session down, after seeing strong gains on the previous day when the US put together a deal to avoid the fiscal cliff.
The FTSE 100 and the Euro Stoxx 50 also fell after opening this morning. Gold dropped on the news as investors worried that QE’s supportive effect on the yellow metal’s price would be removed by the end of the year.
Capital Economics chief US economist Paul Ashworth said: “Most commentators had expected the asset purchases to continue well into 2014. That said, it was always possible that the Fed would reduce its monthly purchases before then.
“Ultimately, it is the prevailing economic conditions that will determine when the Fed halts or slows the pace of its asset purchases. We suspect that another year of lacklustre economic growth in 2013, coupled with only a modest improvement in the unemployment rate, will persuade the Fed to sustain QE into 2014.”
