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04 November 2014

Fed Stops Printing Money 

The US Federal Reserve has completed the ‘tapering’ of its quantitative easing program, which injected tens of billions of dollars into the American economy through bond purchases, but higher interest rates still look to be a year away in the US and even further off in other parts of the world.

Throughout the year, the US central bank has been steadily winding down its bond-buying programme – originally $85 billion a month – reducing it by $10 billion at a time. It says the move has been justified by the continued strengthening of the country’s labor market, as unemployment has fallen from 8.1% to 5.9% over the past two years.

Since 2008 the Fed has conducted three programmes to pump money into the US economy through asset purchases totalling nearly $4 trillion; but such are the constraints on economic activity that the initiatives have not led to any upsurge in inflation.

Although the US economy is now showing a demonstrable recovery, elsewhere there are still dark clouds – especially in Europe, where growth has fallen back down in recent months. Even the Fed says it is in no hurry to raise interest rates from the near-zero levels it has maintained for almost six years, and for the time being it will continue to reinvest the proceeds of bonds in its portfolio as they mature.

Even though inflation, 1.4% over the 12 months to the end of September, remains lower than the Fed’s target of 2% a year, analysts believe US interest rates could start to rise within the next 12 months.

That will depend on the economic recovery remaining on track. Meanwhile in Europe and Japan, asset purchases remain in vogue as the priority for central banks is to head off the threat of deflation.