Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

Inside the Market

Up-to-the-minute insights
on developing market news

Entry archive:

A press conference by Federal Reserve Board chairman Ben Bernanke is seen on a television on the floor of the New York Stock Exchange. (BRENDAN McDERMID/REUTERS)
A press conference by Federal Reserve Board chairman Ben Bernanke is seen on a television on the floor of the New York Stock Exchange. (BRENDAN McDERMID/REUTERS)

Fed introduces key wording change on future stimulus plans Add to ...

The latest monetary policy statement from the U.S. Federal Reserve, released Wednesday afternoon, has done little to improve the mood among investors, even as it introduced two key changes: The S&P 500 was down more than 8 points or 0.5 per cent in afternoon trading, not far from its lows for the day.

More Related to this Story

Despite the collective shrug from investors, the Fed’s policy statement contained two shifts from the previous statement in March. The Fed is now saying that “fiscal policy is restraining economic growth” – a nod to the dysfunction in Washington that has slashed government spending this year.

The line sounds slightly more alarmist than last month’s “fiscal policy has become somewhat more restrictive” and follows last week’s report showing the U.S. economy expanded just 2.5 per cent in the first quarter.

The other, bigger, shift could be key to the Fed’s policy of using bond purchases, or quantitative easing, to hold down borrowing costs and provide economic stimulus – and, according to some observers, give the stock market a substantial boost. The Fed now says that it is “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (The emphasis is ours.)

That introduces some guesswork as to which direction stimulus is headed.

“We don’t think that means the FOMC is about to raise the pace of its purchases from the current $85-billion per month,” said Paul Ashworth, chief U.S. economist at Capital Economics, in a note. “Nevertheless, the fact that the Fed felt it necessary to point out that the pace of purchases can be adjusted in both directions presumably means that, at the very least, it is less inclined to slow the rate of purchases any time soon.”

A couple of other comments:

Michael Dolega, TD Economics: “Previously, the focus was placed on the speed of reduction, and this new statement speaks volumes to the underlying volatility faced by the ongoing economic recovery, faced with policy uncertainty, fiscal retrenchment, and weakening global growth.”

Paul-André Pinsonnault/Krishen Rangasamy, National Bank Financial: “By formally stating that it could increase or reduce the pace of its purchases, the Fed is keeping all its options open as far as QE is concerned. If, as we expect, the U.S. economy picks up speed in the second half of the year (after a temporary sequester-related soft patch in Q2), the most likely scenario, in our view, remains a tapering off of the asset purchase program towards year-end.”

Follow on Twitter: @dberman_ROB

 

For Globe Unlimited Subscribers

Business videos »

Most popular videos »

Highlights

Most Popular Stories