The U.S. Federal Reserve Board remains committed to its plan to reduce bond buying, which may spell further market volatility ahead, economists say.
The Fed maintained its path of tapering its quantitative easing (QE) program Wednesday; announcing that it will reduce its asset purchases by another US$10 billion. It also didn’t alter its guidance on interest rates, suggesting that rates will stay low for some time.
“Today’s statement was more upbeat with the Fed acknowledging that the economy had picked up its pace in recent quarters and that on balance labour market conditions continued to improve,” notes RBC Economics, adding that it expects the Fed to continue reducing asset purchases as the year goes on. “The improvement in the economy is recent quarters will keep the Fed on course to implement its slow policy stimulus reduction plan in the year ahead,” it says.
This view is echoed by economists generally. BMO Capital Markets says that it expects another US$10 billion reduction in bond buying at the next Fed meeting. “The bar to stop tapering is high, particularly if the broader economy continues to boast decent growth,” it says.
Indeed, TD Economics notes that the Fed “appears to have paid little attention both to the poor December payrolls and the jitters across [emerging markets] of late. To the extent that weak payrolls have been perceived as temporary and the post-tapering repercussions for EMs had already been anticipated by last summer’s pre-tapering scare, today’s indifference towards these two elements was expected.”
“As long as EMs woes do not percolate on U.S. shores with waves that threaten the U.S. recovery, the FOMC is unlikely to alter its course in response to these developments,” it adds.
National Bank Financial says that this determination to curb QE means that investors should “expect the Fed’s actions to continue to foster an environment of heightened financial market volatility.”