Fed bond buying reduced to $65 billion per month

The Federal Open Market Committee (FOMC), the Federal Reserve’s policy-making committee, says today that it will reduce its bond purchases in February from the current $75 billion to $65 billion per month.

The Fed bond buying decision coincided with Wall Street extending its slide and several emerging market’s central banks raising their interest rates.

Starting in February, the Committee will buy agency-mortgage-backed securities at a rate of $30 billion per month (down from $35 billion), and will add to its holdings of longer-term Treasury securities at a rate of $35 billion per month (down from $40 billion).

The voting for the FOMC monetary policy action was unanimous, the first time there was no disagreement at a policy meeting since June 2011. The following people were at the meeting: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Janet L. Yellen; Richard W. Fisher; Sandra Pianalto; Narayana Kocherlakota; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

FOMC offered a mixed review of the US economic situation

According to data received since the FOMC met last month, economic growth in the US picked up in recent quarters. While labor market indicators were mixed, on balance they showed further improvement. Although the unemployment rate has dropped, it is still high.

In recent months business fixed investment and household spending has advanced more quickly, while the housing sector’s recovery has slowed down.

The Board of Governors of the Federal Reserve System wrote:

Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

The Fed seeks economic growth and declining unemployment

As mandated, the FOMC says it seeks to achieve maximum employment and stable prices. With the right policy accommodation, it expects economic activity to grow at a moderate rate and unemployment will decline gradually.

“The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced,” the FOMC added.

The FOMC is aware that an inflation rate persistently below its 2% target could potentially undermine economic performance. It says it is monitoring inflation developments closely as it tries to move inflation back towards its objective over the medium term.

Emerging markets affected by Fed bond buying decision

The Fed’s decision to carry on scaling down on its stimulus package has been affecting emerging markets and currencies. According to investors, the bond-buying program initially pushed investors to move their money into emerging markets, where risks and potential returns are greater. Now, investors are starting to move in the opposite direction.

Several central banks in emerging economies have raised their benchmark interest rates in an unsuccessful attempt to halt the selloff of their currencies. As soon as the Fed’s decision was made public today, financial-market volatility returned.

The Fed started scaling back on the stimulus program in December, reducing the monthly bond-buying from $85 billion to $75 billion. Fed Chairman, Ben Bernanke, who leaves his post on January 31st, strongly hinted that the scaling down would be done monthly, at $10 billion each month.

The FOMC emphasized that asset purchases are not on a preset downward course. The members wrote:

“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

“However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”