Stimulus left unchanged at $85 bn by Fed

The Federal Reserve left its $85 billion a month stimulus programme unchanged and decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. The action is not a surprise but  in line with Chamber’s expectations. The fact is that advanced economies are still in a sluggish growth trajectory and recent up tick in the growth numbers is majorly with the support of stimulus programmes. Going ahead, markets may remain volatile with appreciating bias and rupee is expected to consolidate at around 60 per dollar by Dec 2013, going forward.

The Federal Open Market Committee (FOMC) kept the stimulus package unchanged at $85 bn as it sees improvement in economic activity and labor market conditions and hence decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

Consequently, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 bn per month and longer-term Treasury securities at $45 bn per month. The Committee seeks to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These measures would help to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn would promote a stronger economic recovery and help to ensure that inflation is at the rate most consistent with the Committee's dual mandate, over time.

FOMC expects that the economic growth will pick up from its recent pace and unemployment rate gradually declining towards the level the Committee believes is consistent with appropriate policy accommodation.

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished. However, the tightening of financial conditions if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2% objective could pose serious risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. For tackling unemployment, the Committee decided to keep the target range for the federal funds rate at 0 to ¼% and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2%.

Thus, the Committee reaffirmed its view that a highly accommodative stance of the monetary policy will remain appropriate after asset purchase program ends. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%.

Warm regards,

Dr. S P Sharma

Chief Economist