Speaking at a press conference, the chariman of the Federal Reserve said if forecasts were correct tapering would begin towards the end of the year, although there was no deterministic or fixed plan.
He also revealed the committee had increased its GDP growth forecast to 3 – 3.5% from 2.9 – 3.4%, although inflation expectations remained the same. Interest rates were kept at a record low 0-0.25%, and will not increase until unemployment, currently 7.6%, hits 6.5%.
The Dow Jones fell 1.3% in afternoon trading yesterday while the FTSE 100 is down 2% since opening this morning.
The benchmark for 10 year government bond yields rose to a 15 month high on the back of the announcement the government may start to draw back its $85bn a month bond buying.
Implications
Schroders have brought forward their expectations of tapering to start in December, previously predicting Q2 2014.
Keith Wade, chief economist at Schroders, said: Data would have to be quite robust for a move in September this year, which seems unlikely given that the full impact of fiscal tightening has yet to be felt in the US and the global economy remains soft (judging from today’s flash PMI’s for China and Germany). Inflation is also expected to remain low (although the Fed acknowledged this in its forecasts).
"These moves offer a roadmap for the exit from QE and so provide some clarity to the markets. Strong growth would now be seen as bad news by bringing forward tapering, but the Fed will be aware that significant increases in bond yields will hit the recovery through higher mortgage rates. Weaker equity markets could also slow activity by reversing wealth effects. On the positive side investors should have increased confidence in recovery, but the immediate focus will be on the unwinding of liquidity trades."
Find out here what Nicolas Trindade of Axa Investment Managers said about the impact of the QE decision on the economic outlook before yesterday’s announcement.
