Fed Cites Improved Labor Market While Ending QE as Planned
Comment of the Day

October 29 2014

Commentary by David Fuller

Fed Cites Improved Labor Market While Ending QE as Planned

Here is the opening of Bloomberg’s report on the Fed’s policies now that it has ended QE3

The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.

“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” theFederal Open Market Committeesaid today in a statement inWashington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.

Policy makers maintained a pledge to keep interest rates low for a “considerable time.”

While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.

Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s.

David Fuller's view

To the Fed’s credit, it has been totally transparent in its assessments of economic data, and carefully signalled every step in its policy of gradually phasing out QE3, to ensure that their have been no sudden surprises for consumers, businesses or the financial markets.

Sensibly, it has left its options open by not providing a detailed assessment of developments that would either hasten or delay the eventual increases in short-term interest rates which we can expect as the economy gradually recovers.  However, the Fed has reaffirmed its policy of keeping rates low for a “considerable time.”  It has also indicated that it will not end the reinvest of maturing instruments in its balance sheet until it has raised the benchmark interest rate.

In other words, despite the ending of QE, the US still has a very benign monetary policy.  This will remain a tailwind for the stock market for at least the medium term.  It will not prevent corrections but the risk of a more serious market slump should remain low for the next few months, and as circumstances change, we should be able to identify both risks and opportunities by monitoring our price charts. 

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