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Fed signals surprise end to QE3

Fed signals surprise end to QE3

The Fed has signalled that it may discreetly begin withdrawing the punchbowl from the party, with notes from its latest meeting revealing officials could withdraw special funding by 2014.

The minutes of the December Fed Open Markets Committee released last night showed that even as Bernanke committed himself to pegging policy to the unemployment rate, members were ‘divided’, with several wanting to slow or cease asset purchases by the end of 2012.

Central Banks the world over have been forced to take unprecedented and unusual approaches in an attempt to manage the financial disruption of recent years.

The New Year showdown over the fiscal cliff and the legislative fudge which followed, to say nothing of the impending US row over spending cuts, arguably demonstrate why they have felt a need to act.

‘The Fed is now buying $85 billion of Treasury securities and agency MBS each month, which adds up to roughly $1 trillion per year,’ said Paul Ashworth, head economist at Capital Economics.

‘As a result, the Fed's already bloated balance sheet will increase by about 40% in 2013. Officials are worried that such an expansion could prompt a surge in inflation expectations and would make it more difficult, when the time eventually came, to implement any exit strategy.

‘According to the minutes "a few members" thought that the purchases should continue until the end of 2013, while "several others" thought they should be stopped "well before" the end of this year. Given that the Fed isn't expected to start raising interest rates from near-zero until mid-2015 or even later, most commentators had expected the asset purchases to continue well into 2014.’

He added that the company’s central prediction was that lackluster economic growth and continuing political paralysis would force the Fed to remain accommodative well beyond 2014, however.

The intractability of concerns about a potential inflationary surge as a result of the Fed’s actions was underlined yesterday, when Pimco fixed income supremo Bill Gross again warned of the prospect.

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