The US Federal Reserve took its first step away from its historic third round of asset purchases monthly buying from $85bn to $75bn.
Starting in January, the Fed will taper its Treasury purchases by $5bn to $40bn a month, and its mortgage-backed securities purchases by $5bn to $35bn a month.
A majority of 9-1 voted for the decision. Eric Rosengren, president of the Boston Fed, dissented saying that the taper was premature until the data showed that stronger growth will be sustained.
“The Committee sees the improvement in economic activity and labour market conditions?.?.?.?as consistent with growing underlying strength in the broader economy,” says the Fed statement. If the data stays strong it will “likely reduce the pace of asset purchases in further measured steps at future meetings”.
The 10-year Treasury yield rose to 2.92 per cent, and the benchmark yield retreated to 2.87 per cent, up four basis points on the day. The dollar rose on a trade-weighted basis, while gold trimmed early gains.
The taper comes 15 months after the Fed began its unprecedented third round of asset purchases in September 2012. Unlike previous programes, there was no limit on its size, with the Fed pledging to buy until it achieved a “substantial improvement” in the outlook for the labor market.
Since then it has bought more than $1tn in Treasuries and MBS. Even with a taper, its total balance sheet will soon exceed $4tn.
The goal of the purchases is to drive down long-term interest rates and stimulate the economy now that short-term rates are already stuck at zero. The Fed regards QE3 as booster to increase the economy’s momentum and always intended to slow and stop the purchases once that was achieved.
