Cheer up – Fed’s move signals recovery

US Fed outlines plan to withdraw stimulusAustralian dollar dives on US Fed moves

So now we know, and after the markets throw a minor tantrum, most investors will decide very little has changed. The sky is not falling in: it’s an economic recovery story in the US – get used to it.

In the Federal Reserve’s statement after its rate-setting meeting and even more clearly in chairman Ben Bernanke’s opening press conference statement an updated, more positive outlook for the the United States economy is presented, and a quite precise timetable for the progressive retraction of quantitative easing and then (and only then) a gradual increase in the Fed’s benchmarket interest is flagged.

Inflation is not a problem, and if the Fed’s more upbeat economic projections are confirmed “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke says in his prepared press conference statement.

If the forecasts continue to be correct and the US economy continues to improve “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year”.

As for rates, they only rise after QE is phased out – a “considerable” time after, Bernanke says. And rates will only rise if the US economy is sustaining what Bernanke calls “a reasonable cruising speed … we will ease the pressure on the accelerator by gradually reducing the pace of purchases (but) any need to consider applying the brakes by raising short-term rates is still far in the future.”

The updated economic forecasts the Fed has released suggest that late next year is the abolute earliest rates would move, and that 2015 is still the likely time, after an unemployment rate of less than 6.5 per cent is entrenched.

In the projections submitted for the meeting of the Fed’s rate-setting committee, 14 of the 19 members indicated that they expected the first move up in rates in 2015. One other expected it in 2016.

It is also still the case that that monetary policy will not be tightened if this blueprint for economic recovery is not met.

The policy is “in no way predetermined”, Bernanke says. “If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favourable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labour markets, reductions in the pace of purchases could be delayed; indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.”

Only an habitual pessimist could take all this and declare that the sky is falling in for the markets. This is about responding to economic recovery, in a gradual way.

As Bernanke says, the eventual move up in rates is tied to unemployment dropping to at least 6.5 per cent. The 6.5 per cent mark is a threshold, not a fixed target.

QE will also not be dumped in one swoop. The stimulus will contine but gradually reduce, if the economy can handle it.

The original release of this article first appeared on the website of Hangzhou Night Net.