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Fed pencils in October exit on the calendar

Wednesday, Jul 09, 2014 - 02:38

Minutes from the Federal Reserve's June meeting indicate policymakers may wrap up their bond buying program a little earlier than expected, prompting new speculation about how soon interest rates will rise. Bobbi Rebell reports.

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The Fed is firming up its exit plan. Minutes from the U.S. central banks' June meeting detail how it plans to ease the economy out of an era of loose monetary policy- possibly wrapping up its bond buying program in October. At that time, the final reduction would be by $15 billion, rather than the $10 billion it's been cutting after each meeting. That then leaves the question of when rates will rise. Chris Rupkey is the Chief Financial Economist at Bank of Tokyo- Mitsubishi: SOUNDBITE: CHRIS RUPKEY, CHIEF FINANCIAL ECONOMIST, BANK OF TOKYO-MITSUBISHI (ENGLISH) SAYING: "Remember a while back the Fed chair got trapped perhaps into saying considerable period from the end of QE to the first rate hike was si6 months. Well, if they end in October, the first rate hike could be in March." That is a bit earlier than many economists' forecasts- which remain at the middle of next year. Barclay's Michael Gapen: SOUNDBITE: MICHAEL GAPEN, MANAGING DIRECTOR, U.S. ECONOMIC RESEARCH AND GLOBAL ASSET ALLOCATION, BARCLAYS (ENGLISH) SAYING: "We do think they will ultimately move to push rates higher in the middle of next year. But the pace of that tightening cycle should be much slower than normal. So, the historical average would be that the Fed raises rates at about 2 percent or more per year over a 2 year period. They are guiding more at about 100 basis points a year over a 4 year period, so they are looking to move much slower than they normally would." Fed officials were confident moderate economic growth would continue- but they were still concerned about the lingering impact of the recession- something Rupkey took issue with: SOUNDBITE: CHRIS RUPKEY, CHIEF FINANCIAL ECONOMIST, BANK OF TOKYO-MITSUBISHI (ENGLISH) SAYING: "June is the fifth year of the recovery from the end of the recession. Five years. Many of our economic expansions in history, from the bottom of a recession to the next peak and then the new recession, they have only been five years. So, I mean, this is an enormous amount of time. It doesn't ring true that conditions in the economy are that worrisome that they need to keep over-managing the economy, keeping rates at this low level. I think they are too cautious." Reuters columnist James Saft was also critical: SOUNDBITE: JAMES SAFT, REUTERS COLUMNIST (ENGLISH) SAYING: "They lowered their medium term inflation forecast downward reflecting a re-assessment of the underlying inflation trend. That is a great reflection of how Q-E has worked, which is not very well in terms of the Fed's actual goals." One of those goals- managing interest rates going forward. The minutes reveal they are near a plan which would involve using overnight repurchase agreements in tandem with the interest it pays banks on excess reserves, to set a ceiling and floor for its target interest rate.

Fed pencils in October exit on the calendar

Wednesday, Jul 09, 2014 - 02:38

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