In the policy meeting, the Federal Reserve maintained the policy rate i.e. Fed funds rate unchanged at 0-0.25%. The Fed also reiterated that the exceptionally low range for the federal funds rate will be appropriate at least till a.) Unemployment rate is greater than 6.5%, b.) Inflation over the next one to two year period remains lower than 2.5%, and c.) Longer-term inflation expectations continue to remain well anchored.
The Fed also maintained the asset purchase program. The Chairman reconfirmed that the Fed would continue to buy longer-term US treasury securities at the rate of USD 45 bn/month and the Agency MBS at USD 40 bn/month.
. On the most important question of when will the Fed start tapering its asset purchase program, Fed remained non committal.
. On economic data prints, Fed noted that information since September'2013 policy meeting suggest that economic activity is expanding at a modest pace. More specifically, labor market conditions have shown signs of improvement in recent months but the unemployment rate continues to remain elevated.
. In nutshell, Fed is of the view that "the downside risks to the outlook for the economy and the labor market have diminished substantially, though not enough to start tapering its asset purchase program."
. Though the deferment of tapering was broadly in line with the consensus expectation, it has negligible impact on the markets. However, from a medium term perspective, Fed will have to start calibrating on reversing its easy monetary stance, else it run the risk of creating imbalances in the financial markets. In this regard, it should be recognized that the easy monetary stance during the 2001-2004 period was the genesis of the credit crisis of 2008-09.
Please refer to the attached document for the detailed report
Regards,
ICICI Bank : Treasury Research
