The Federal Reserve recently began cuts to its $85-billion-a-month asset-purchase program following its December 17-18 Federal Open Market Committee (FOMC) policy meeting. The program was part of the federal government’s monetary stimulus implemented to address the financial crisis of 2008. The action by FOMC was announced at what is expected to be Fed Chairman Ben Bernanke’s final news conference as the agency’s chief, and, he pointed out in his comments that incoming Fed Chairman Janet Yellen was closely involved in the decision.
Tapering the quantitative easing, as the Fed has referred to the bond-buying cut back, had been discussed earlier in 2013 which sent a chaotic ripple through emerging-market currencies. Since mid-2013, however, some emerging market debt and currencies have become more attractive to investors, and, fund managers have not seen that interest diminished by the Fed’s most recent decision. Investors now indicate that they believe rates will rise at a slower pace, giving them confidence to return to emerging currencies. The Fed is also not expected to raise interest rates before 2015, and that is also fueling confidence in the market.
The Fed had previously indicated that confidence in the economic outlook, easing of fiscal uncertainty, and more appropriate interest rates would signal a suitable time to implement tapering. Current conditions show near satisfaction of the Fed’s three self-imposed tests and, although the Fed could have postponed tapering to January, the committee determined that there was little to be gained in terms of further economic recovery by postponing just one more month.