Why did the FOMC continue QE?

By: Submissions

Sahil Hafeez writes: The FOMC (Federal Open Market Committee) affirmed the results of its September 17-18 gathering. It won't close Quantitative Easing until the economic indicators are closer to the Fed's targets.

What are these economic indicators?

These are:

→ Unemployment at 7% (it's now at 7.3%)
→ GDP at 2%-2.3% (It's was 2.5% in Q2, but looks like it could slow down if Congress risks another government shutdown.)
→ Inflation is at its 2% target (it's now at 1.8%).
.
What will FED do to precede QE?

The Fed will press on to buy $85 billion in long term Treasuries and mortgage-backed securities until anyhow the October 29-30 FOMC gathering. It could start the decreasing (bringing down) methodology around then if the economy seems as though it’s gathering the Fed's targets.

How might QE continuation connect with Fed Fund rate & Discount Rate?

It might mean the Fed funds rate (The FED uses this rate to control the interest rate banks charge for loans and pay for deposits) and the discount rate (rate that the Federal Reserve charges banks to borrow at its discount window.) will remain between 1/4 points and zero until 2015. Ten of the 17 Fed authorities said they suppose it will stay beneath 2% until 2016. (Source: WSJ)

What do we call this QE continuation?

The Fed will keep expansionary money related strategy in actuality, while continuing to monitor economic indicators. Current fiscal policy,
such as the looming (to weave) debt ceiling and budget crises, is restraining (restrict) economic growth.

What Fed-watchers would expect before FOMC gathering?

Numerous Fed-watchers anticipated that Bernanke (FOMC, chairman) will begin tapering now to straightforwardness the move to the new Fed seat. The tapering defers means the economy is more terrible than everybody considered. Then again, Bernanke has said up and down that the Fed will act according to economic indicators, which look marginally more terrible than the Fed considered. Truth be told, the Fed brought down its GDP development figure, and raised its unemployment conjecture, during the current year.

How It Affects You?

Short-term interest rates, like those on money market accounts and other savings, will remain low. That is since these investment rates are determined by the Fed fund rate. This means investors will continue shifting savings out of these low-yielding accounts and into

higher-yielding dividend-paying stocks. Now that the economy is improving, it's looking less like investors will lose their money.
 
 The yield on the benchmark 10-year Treasury note will likely stay beneath 3% until the Fed initiates action. That's because bond buyers have already priced in a taper, driving rates up 70% since May. As demand for Treasuries decline, the yield rises.

 As the Treasury yield rose, so did mortgage interest rates. However, it hasn't been enough to slow down the housing recovery. In fact, rising rates seemed to have prompted anyone in the market to buy now, before rates even get higher. That's good for housing and homebuilders
 
As the Fed maintains its policy, stock prices will probably continue to rise over the next six months to a year. That's because a consistent Fed policy reduces uncertainty. Businesses can plan for anything, but they need to know what it is. Bernanke understands this. He's said that managing expectations is critical to economic growth.

By Sahil Hafeez

Qualifications: MBA, CFA, FRM
Current City: Hong Kong

© 2013 Copyright  Sahil Hafeez - All Rights Reserved

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