Federal Reserve defers QE3 tapering to 2014

James Ryan Jonas

Philippine stocks are most probably gearing for a rally today following the announcement of the U.S. Federal Reserve that it will not end its Quantitative Easing program.

Earlier today, U.S. Federal Reserve Chairman Ben Bernanke said that the Fed will continue with its bond-buying program because current market conditions “are still far from what all of us would like to see”.

Bernanke said recent data on economic activity and labor market conditions were not enough to convince the Fed to start tapering its QE3 program.

The U.S. unemployment rate in August 2013 was 7.3% — still at the high end of the 7.1% to 7.3% expected rate by the end of the year. The Fed expects the unemployment rate to go down further to 6.5% to 6.8% in 2014, but the U.S. economy appears to be struggling with this target.

In addition, Gross Domestic Product (GDP) forecasts for 2013 have been lowered to 2.0-2.3%, from 2.3-2.6% announced earlier this year. The U.S. inflation rate, though, is stable showing little sign of exceeding the 2.5% target.

These economic data convinced members of the Federal Open Market Committee (FOMC) to “await more evidence that progress will be sustained before adjusting the pace of its purchases”, Bernanke said.

Thus, the Fed will continue with the QE program — an $85 billion monthly bond-buying scheme meant to infuse liquidity into the market in the hopes of stimulating economic activity.

(Click here to learn more about the U.S. Federal Reserve’s Quantitative Easing (QE3) Program.)

Bernanke warned, though, that the QE tapering plan is still on track and may happen before the end of the year but this depends on how the economy progresses.

“We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data. We don’t have a fixed calendar schedule,” said the Fed Chairman.

U.S. stocks rallied to fresh highs following the announcement. The Dow closed at 15,676.94, up 147.21 points or 0.95%. The S&P 500, meanwhile, ended the day’s trading up 1.22% closing at 1,725.52.

Given such performance and the Fed announcement, expect the Philippine Stock Exchange (PSE) to follow a similar rally today. Will Philippine stocks close less than 1% or higher than 1%? Or do you think it will buck the trend and end at a loss?

What do you think?

James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.