Monday - Apr 24, 2017

The US Federal Reserve set to end bond buying by October


The US Federal Reserve set to end bond buying by October

The US Federal Reserve (the Fed) has announced their plans to gradually wind down their long running Quantitative Easing program of asset purchases from October if the US economy continues the steady improvement that it has shown since the beginning of the year.

This positive news was released with the conclusion of the Fed’s June meeting.

The news of the long anticipated wind down of QE has been coming for some time now, with the Fed gradually decellerating their asset purchases by $10 billion every month this year, with the buying level currently sitting at $35 billion monthly. There has been some speculation that the Fed would taper their purchases so that QE would taper down more gradually till the end of December, but it now appears that the process will be finally put to sleep in October with a $15 billion taper in October, ending the third stage of Quantitative Easing, (QE3) which began in September of 2013, on the orders of the then Chairman of the Federal Reserve, Ben Bernanke.

The signal from the Fed of a clear end-date for the QE3 program has added weight to ever increasing speculation that the next step in the US economy recovery program will be an increase in interest rates.

According to reports, the current Chairperson of the Federal Reserve, Janet Yellen has been preparing a form of “exit strategy” to prepare for the raising of interest rates, which will be a key component in shaping how future of the Fed’s financial policy is conveyed to financial markets.

When the Fed does start to increase interest rates, speculation is rife that they will be expressed as a range, in keeping with the current formula of showing interest rates within a scale, for example “0 – 0.25 per cent”, instead of the previous formula of setting the interest as a single number.

If adopted, this formula will grant the Fed license to make only a minimal use of its recently introduced “reverse repo” facility, which describes a means for non-bank players, such as money market funds, to make deposits at the Fed, in turn minimising distortion in the US financial markets.

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