Dear All ,

Federal Reserve announces further tapering of Asset Purchases to US$15bn  

Keeps Interest rate unchanged at 0.25%; US economy is projected to grow between 2% and 2.2% for 2014

The FOMC (Federal Open Market Committee) an arm of Federal Reserve Bank, has announced to cut-down its monthly bond purchases to US$15bn from US$25bn, while reducing the range of growth projections between 2% and 2.2% for 2014. The Federal Reserve confirmed its commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed as the economy is expanding at a moderate pace and inflation is below its 2% goal. 

FOMC has announced to continue tapering in its bond-buying program, reducing its monthly asset purchases to US$15bn from US$25bn. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of US$5bn per month rather than US$10bn per month, and will add to its holdings of longer-term Treasury securities at a pace of US$10bn per month rather than US$15bn per month. The FOMC currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the FOMC has decided to make a further measured reduction in the pace of its asset purchases. 

To support continued progress toward maximum employment and price stability, the FOMC has reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0.0% to 0.25% target range for the federal funds rate, FOMC will assess progress, both realized and expected, toward its objectives of maximum employment and 2% inflation. 

The FOMC has downgraded its economic projections for 2014 and 2015 from the estimates made previously in the month of June. As per latest estimates, US is expected to grow between 2% to 2.2% for 2014, compared with a June forecast of 2.1% to 2.3%. In 2015, the US economy is forecasted to grow between 2.6% to 3%, compared to 3% to 3.2% growth forecast in June 2014. The unemployment rate is forecasted between 5.9% and 6% for 2014, compared to 6% and 6.1% forecast in June 2014. The revised estimate for PCE (Private Consumption Expenditure) inflation rate is 1.5% and 1.7% for 2014, which is in line with June’s PCE inflation figures.

                   Economic Projections for USA - Federal Reserve Bank                                                (%)

	Central tendancy1
Variable	2014	2015	2016	2017
Change in real GDP	2% - 2.2%	2.6% - 3%	2.6% - 2.9%	2.3% - 2.5%
June projections	2.1% - 2.3%	3% - 3.2%	2.5% - 3%	n.a
Unemployment rate	5.9% - 6%	5.4% - 5.6%	5.1% - 5.4%	4.9% - 5.3%
June projections	6% - 6.1%	5.4% - 5.7%	5.1% - 5.5%	n.a
PCE inflation	1.5% - 1.7%	1.6% - 1.9%	1.7% - 2%	1.9% - 2%
June projections	1.5% - 1.7%	1.5% - 2%	1.6% - 2%	n.a

Source : PHD Research Bureau, Compiled from Federal Open Market Committee, Federal Reserve Bank

Note: Data pertains to September 2014 Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation is the percentage rates of change in the price index for personal consumption expenditures (PCE). Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 17–18, 2014.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.

2. The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year.

In addition, the FOMC has expressed its intention to implement the following key elements, when appropriate, for the normalization of its monetary policy stance:

• The FOMC will determine the timing and pace of policy normalization - meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings - so as to promote its statutory mandate of maximum employment and price stability.
• The FOMC intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the System Open Market Account (SOMA).
• The FOMC intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
• It is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.