With Ben Bernanke at the helm for a few more months, the good ship US Federal Reserve is to continue on course and speed until further notice, much as everybody was expecting. This means that the process of “Tapering” the Federal Reserve’s asset purchase programme will be further delayed. At the moment, the Federal Reserve is purchasing $85 billion worth of assets each month with the aim of ensuring liquidity in the US economy such that businesses can borrow funds that they may need to expand cheaply. The programme also aims to keep mortgage borrowing costs reasonable for the hard-pressed US home owner and to keep the nation’s borrowing costs down.
Many analysts had anticipated that “tapering” (the process of cutting back and, eventually, ending the asset purchase programme) would have been announced last month. However, the conditions stipulated under the Fed’s “forward guidance” have not been met yet (even if there is a suggestion that the goalposts may be moving). The situation was clearly exacerbated by the failure of lawmakers to agree to a budget which led to a partial shutdown of the government for two weeks and the fiscal brinkmanship which saw the US move to within hours of a fiscal default before the debt ceiling was raised.
The Fed noted that “fiscal policy is restraining economic growth”, in a none to carefully veiled reference to the recent political stalemate in Washington. It must be remembered that the last-minute fix to the budget and debt ceiling problems did not resolve either matter, but enabled temporary measures to be put in place which give the lawmaker until mid-January and February next year to negotiate proper solutions to the crisis.
Commenting at the end of their most recent two-day monetary policy meeting, the Fed noted that: "Economic activity has continued to expand at a moderate pace," "the unemployment rate remains elevated."
According to “forward guidance”, the process of tapering will not begin until unemployment falls from its current level of 7.2% to 6.5%, but there have been suggestions that the trigger point may be moved to 7%.