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US Fed begins moderate tapering
December 19, 2013, 2:41 am

Speculation of Fed tapering has boosted US markets and strengthened the dollar against the Yen [Getty Images]

Speculation of Fed tapering has boosted US markets and strengthened the dollar against the Yen [Getty Images]

Citing better than expected economic indicators and the fall of the unemployment rate to 7 per cent, the US Federal Reserve on Wednesday decided to scale back its quantitative easing program by $10 billion.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed’s policy-making Open Market Committee (FOMC) said in a statement.

Its monthly bond-buying programme will now be reduced from $85 billion to $75 billion.

FOMC also announced it could keep interest rates near zero despite falling unemployment figures.

The US stock market appeared to welcome the Fed’s move, which signals renewed confidence in the economy.

Both the Standard and Poor’s 500 and the Dow Jones Industrial Average indices advanced several percentage points to break record levels by the close of trading on Wednesday.

Global markets had been anticipating such a move especially since outgoing Federal Reserve chief Ben Bernanke announced in late May of this year that scaling back of the monetary policy would begin in mid 2014.

His announcement at the time created significant market volatility in emerging markets, but in the US on Wednesday markets welcomed the move.

The unemployment rate – at its lowest since 2008 – in addition to data pointing to the highest consumer confidence level since the October Federal Shutdown, and the highest home construction rate in five years, indicates that the economy may be wobbling it’s way firmly out of recession and into more stable recovery.

Latin American markets have for the past week been speculating about this move and currencies have been devalued across the board.

When the Fed began its quantitative easing programme by buying back bonds at higher prices, the ‘extra’ cash found its way to emerging markets as investments. Now, with the likelihood of the Fed tapering in 2014, the extra money will exit these markets, which will be unable to sustain the loss and in turn, suffer currency devaluation.

But on Wednesday, Brazil – which saw its real currency lose ground over the summer and depreciate by 12 per cent year to date – announced it was ready for the Fed’s tapering.

President Dilma Roussef tried to assuage any fears the tapering could have on local markets by delivering a statement on Brazilian national radio.

“Brazil has never been so ready,” she said.

Source: Agencies