US Federal Reserve Scales Back Monthly Bond Purchases By $10 Billion

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US Federal Reserve Scales Back Monthly Bond Purchases By $10 BillionThe Federal Reserve has announced that it will wind down its huge bond-buying spree this coming fall, and hinted that US interest rates may begin to rise early next year.

According to the Federal Reserve Chair Janet Yellen, the Fed will raise rates six months after it ends the monthly bond purchases. The Fed will also slash the bond purchases by $10 billion per month, in what is the third time in a row it has decided to tighten its stimulus program.

This will see the monthly bond purchases fall to $55 billion, down from $65 billion. Last year, the figure was $85 billion.

This is an unexpected path toward the upsurge in interest rates, which caused U.S. bonds and stocks to slump. Futures dealers have now factored in the first interest rate hike as early as April 2015.

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“This is the kind of term it’s hard to define,” Ms Yellen announced in a press briefing. “Probably means something on the order of six months, or that type of thing.”

The Federal Reserve set its overnight interest rate to zero percent in December 2008 in a bid to kick-start growth of the US economy amid the global financial recession.

Ms Yellen also said that the Fed will balance its target of ensuring maximum employment and plans to increase inflation to 2 percent, which is touted as healthier than the present level of 1.5 percent. It won’t increase the federal funds rates, which directly influence interest rates, from the current range of 0 to 0.25 percent until it almost attains its targets on both key indicators.

Ms Yellen was at loss to explain that the Fed’s decision to drop the 6.5 percent unemployment rate, which is used as a benchmark for deciding whether to raise rates, didn’t mean any significant policy changes.

To contact the reporter of this story; Jonathan Millet at john@forexminute.com