Goshen News, Goshen, IN

January 30, 2014

Federal Reserve slows bond buying pace

By MARTIN CRUTSINGER AP Economics Writer
Goshen News

---- — WASHINGTON — The Federal Reserve is pushing ahead with a plan to shrink its bond-buying program because of a strengthening U.S. economy. It’s doing so even though the prospect of reduced Fed stimulus and higher U.S. interest rates has rattled global markets.

The Fed said it will cut its monthly bond purchases starting in February by an additional $10 billion to $65 billion. It also reaffirmed its plan to keep short-term rates at record lows in a statement it issued Wednesday after Ben Bernanke’s final policy meeting. Bernanke will step down Friday after eight years as chairman.

Many global investors fear that reduced Fed bond buying will boost U.S. rates and cause investors to move money out of emerging markets and into the United States for higher returns. Currency values in emerging nations have fallen. India, Turkey and South Africa have raised rates to try to protect their currencies.

Most economists expect a string of $10 billion monthly reductions in bond purchases to be announced at each Fed meeting this year, concluding with a final $15 billion cut in December.

The bond purchases have been intended to keep long-term borrowing rates low to spur spending and growth. The Fed’s decision Wednesday to continue paring its purchases signals its belief that the economy is showing consistent improvement. In its statement, it upgraded it assessment to say “growth in economic activity picked up in recent quarters.”

Stocks fell after the Fed announced its decision. Bond prices rose slightly, and their yields dipped.

The Dow Jones industrial average was down 185 points about an hour after the Fed’s announcement at 2 p.m. Eastern time. It had been down 127 points just before as disappointing earnings from big U.S. companies contributed to a sour mood on Wall Street.

The yield on the 10-year Treasury note slipped to 2.68 percent.

Some analysts said the Fed’s confidence in the U.S. economy appeared to outweigh any concern that the turmoil in emerging market economies might spill over into the United States and other developed nations.

“These economies have not been driven into deep recession,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Their currencies are weak but not in freefall.”

The Fed made no mention of the turbulence that has rocked markets for the past week.

Its bond purchases have helped fuel a huge stock market rally over the past year as investors shifted money out of low-yielding bonds and into stocks. Now that the Fed is cutting back on those bond purchases, many investors fear stocks will fall.

“Ultimately, the Fed sort of had no choice but to reduce purchases at this meeting,” said Dan Greenhaus, chief strategist at BTIG brokerage. “If they had paused, they risked sending a signal to markets that they lacked conviction.”

Janet Yellen, who will succeed Bernanke on Monday, took part in this week’s Fed meeting in her role as vice chair. Yellen has been closely aligned with Bernanke’s policies.

The action Wednesday was approved on a 10-0 vote. The last time a Fed policy statement was approved unanimously was June 2011.

The Fed’s statement repeated a phrase it first used in December: That it would hold its benchmark short-term rate near zero “well past” the time unemployment falls below 6.5 percent. That is part of the Fed’s effort to reassure investors that it will keep supporting an economy that remains less than fully healthy.

The Fed noted that government spending cuts and tax increases are less of a drag on growth than last year. It also said businesses and consumers are stepping up spending.

The unemployment rate dipped from 7 percent to 6.7 percent in December, the lowest point in five years. Still, much of the decline was due to an exodus of job seekers who gave up looking for work and were no longer counted as unemployed.