Fed dashes hopes of QE boost for US economy
Equity markets down and US treasury yields heading back to record lows as Federal Reserve fails to promise QE boost.
Markets have been left disappointed as the US’s Federal Reserve outlined no firm plans to extend the world’s largest economy’s quantitative easing (QE) programme.
Minutes of the most recent meeting of the Federal Open Market Committee (FOMC) - which sets US monetary policy - have revealed that the 12 policymakers would only consider launching more QE if the nation’s economic situation deteriorates further.
“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the committee’s goal,” the minutes said.
Markets responded with disappointment that the Fed was not immediately pledging to expand the QE programme of asset purchases.
Yields on 10-year US treasuries dipped from 1.52 per cent to 1.49 per cent following the minutes, nearing the record low set on June 1 of 1.4387 per cent. The S&P 500 index of the biggest US equities gave up earlier gains to close relatively unchanged following the minutes last night.
The UK’s FTSE 100 index was trading 0.7 per cent lower in early trading today, while the FTSEurofirst 300 was down 0.7 per cent. Asian markets also took a hit overnight, with the Nikkei 225 closing down 1.5 per cent, while the S&P/ASX 200 was down 0.7 per cent.
Paul Donovan, managing director of global economics at UBS, said the minutes were a reminder of why the US central bank is run by economists.
“The minutes of the last FOMC basically told investors to get their rampant expectations of further quantitative policy firmly under control, because it is not happening any time soon,” he said.
While there was no confirmed plan for further quantitative easing, the minutes also showed that “several others” said additional policy action could be warranted if the “if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee’s longer-run objective”.
The committee also said it was “prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”.
Last month the Fed decided to boost its Operation Twist programme in a bid to aid the US economy without taking radical measures.