Fed Likely to wind up QE in October - Real Time Insight

By Neena Mishra,

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Minutes of the Federal Open Market Committee (FOMC) meeting held last month indicate that the Fed is set to end its monthly asset purchases in October. 

Fed officials now believe  that the economic activity was rebounding in the second quarter after a large decline in GDP in the first quarter of the year but they noted that monetary policy needed to continue to "provide the favorable financial conditions required to support the economic expansion".

At the same time, some of them were concerned about low volatility in financial markets and increased risk taking by participants.

FOMC members acknowledged that inflation had moved up recently from low levels seen earlier in the year,  but said that it was consistent with the committee's forecast of a gradual increase in inflation over the medium term

The Fed has been scaling down the purchases this year and currently buys bonds worth $35 billion a month, down from $85 billion a month when QE3 was launched.

With an end-date for QE, the focus now shifts to the likely time of the rate increase. After a strong jobs report last Thursday, the possibility of an earlier-than-expected rate hike has gone up.

However, while the labor market is improving, wage pressures have been missing so far. Per FOMC minutes "participants discussed the prospects for wage increases to pick up as slack in the labor market diminishes. Several noted that a return to growth in real wages in line with productivity growth would provide welcome support for household spending."

Do you expect a rate-hike later this year if the economy continues to grow at the current pace?

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This article appears in: Investing Stocks
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