Ben Bernanke, chair of the U.S. Federal Reserve, said in his speech from May 2013 that sooner or later the Federal Reserve would need to start reducing QE3 (the last stimulus program).
This stimulus package was buying $85 billion of bonds and mortgages every month.
Economists strategized through the summer and into the fall of when and what the Federal Reserve might do next. The majority view was that the Federal Reserve would announce that they would reduce their bond purchasing from $45 billion to $35 billion and continuing purchasing $40 billion of mortgages every month. This program was designed to keep interest and mortgage rates lower than they would have been otherwise.
On September 18th at 2:00 PM EDT, the Federal Reserve announced that economic activity had been expanding at a moderate pace with some improvements in the labor market however the unemployment rate remains too high. As well, mortgage rates rose during the summer and the (dysfunctional) US fiscal policy has restrained economic growth.
The market was surprised when the Federal Reserve announced that they were continuing with the full purchase of $85 billion of bonds and mortgages each month. The Federal Reserve reaffirmed its view that interest rates will remain unchanged for a long period of time, at least until the unemployment rate is down to 6.5%.
The message the Federal Reserve is delivering is that they will not increase their interest rates for a long time to come. This is in line with comments recently made by Mark Carney, Governor of the Bank of England, stating that central banks could easily wait until the second half of 2016 before raising rates.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or [email protected].
Thanks to Jane Alm of the Angus Watt Advisory Group at National Bank Financial for providing much of this content.