Federal Reserve ends QE, rates to stay low for a considerable time

The Federal Reserve has announced the end of its bond buying programme and decided to keep interest rates unchanged.

The Federal Reserve has announced the end of its bond buying programme and decided to keep interest rates unchanged.

The move by the Federal Open Market Committee (FOMC), the central bank’s rate-setting committee, had been widely expected.

Critically, the US central bank maintained its vow to keep interest rates near zero for a "considerable time".

Likewise, the FOMC continued to judge that the risks to the outlook for economic activity and the labour market were nearly balanced.

The likelihood of inflation running persistently below 2% has diminished somewhat since early this year, the Fed repeated as well.

Fed tweaks statement, actions to be data-dependent

However, the wording of the statement issued tonight regarding the labour market changed noticeably, with policy-makers now referencing "solid job gains and a lower unemployment rate." Following its previous meeting the central bank had said that "the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant under-utilization of labor resources."

As well, on this occasion the Fed admitted that inflation will likely be held down in the near-term as a result of lower energy prices and other factors.

Another variation in the statement was the reference to the fact that if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are “likely to occur sooner than currently anticipated,” or slower should the opposite hold true.

The lone dissenter

Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2% and should continue the asset purchase program at its current level.

Commenting on tonight's decision, Paul Ashworth, chief US economist at Capital Economics, said: "on balance, the Fed believes it is getting closer to meeting the full employment side of its mandate, while it is not necessarily convinced it is losing ground in meeting the price stability side of its mandate. We would say that was, if anything, a slightly hawkish shift. It's also perhaps telling that it was the dovish Narayana Kocherlakota who dissented at this vote, whereas in previous FOMC meetings this year it is the hawks who dissented."

Ashworth adds he would not be surprised if the FOMC omits the reference to a "considerable time" when it next meets in December. He also believes that it will begin to raise rates sooner than "generally expected," with a March 2015 hike being the most likely scenario.

Barclays Research on the other hand sees a first rate rise arriving in June of next year.

As of 18:20 stocks were holding nearly half a percentage point lower on average, with the Dow Jones Industrials off by 65 points to 16,941 and the S&P 500 down by 11 points to 1,974.