The Federal Reserve said it would end the bond buying program known as quantitative easing in October, but retained its guidance that short-term interest rates will remain near zero for a "considerable time" after that program ends.
Last night the Fed announced it was tapering its monthly asset purchase programme by $10 billion, as expected, leaving it on target to make a final reduction of $15 billion at the October meeting, bringing an end to its massive quantitative easing operation.
The Fed maintained the wording in its policy statement that says it will remain appropriate to keep the current low interest rate for "considerable time" after the bond buying ends. Speculation that the "considerable time" message would be removed had led to a consolidation in stocks in the run up to the meeting.
Additionally, the Fed put out new details on how it would manage the mechanics of interest rate increases once the time arrives. The "exit strategy" introduces new instruments that will help the Fed move short-term rates once officials decide the economy can manage tighter credit.
By laying out its exit strategy and announcing its plan to end its bond purchase program, the Fed effectively took two tentative new steps toward winding down the historic easy money policies that have defined its response to the 2008 financial crisis and recessions. But because the economy isn't clearly on a robust path, officials avoided the dramatic step of signalling when rates would start to go up.
Rising rates present a challenge to bond investors, admitted James Tomlins, manager of the M&G European High Yield Bond fund.
“We are entering a new era for interest rates in the developed world. The extended period of ever looser monetary policy is starting to draw to a close. In the wake of the tapering of QE from the Fed, investors now expect to see the first interest rate hikes in many years, initially in the UK and shortly afterwards in the US,” he said.
“Having benefited greatly from falling yields and tightening credit spreads, the move to a more hawkish cycle will create many more headwinds and challenges when it comes to delivering returns for many fixed income asset classes.”
