U.S. Fed announces Quantitative Easing (QE3) tapering

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve announced yesterday, June 19, that if the U.S. economy continues to improve, it will start winding down its asset-buying program and may completely end it by mid-year of 2014.

The news sent stock markets in the United States down by more than 1 percent, with the Dow Jones industrial average (DJIA) closing 205.96 points lower, or 1.34%, at 15,112.27.

The Standard & Poor’s 500 Index (S&P 500), meanwhile, closed 1.39% lower at 1,628.92, while the Nasdaq Composite Index was down 1.12% at 3,443.20.

What is Quantitative Easing 3 (QE3)?

Federal Reserve chairman Ben Bernanke hinted during the FOMC press conference yesterday that the end of QE3 may be coming to a close. He emphasized, however, that this will only happen if the recovery of the U.S. economy continues.

“If you draw the conclusion that our policies — that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” Bernanke said during the conference. “If the economy does not improve along the lines that we expect, we will provide additional support.”

The Fed’s Quantitative Easing (QE 3) program is a monetary policy used by central banks to stimulate an economy when standard monetary policies have become ineffective.

Typical monetary policy of central banks includes purchasing short-term government bonds to drive interest rates lower, with the hopes of stimulating the economy. However, when interest rates are at near-zero levels, as in the case of the United States, this monetary policy is ineffective because interest rates cannot be driven lower further.

In such a case, central banks would buy a pre-determined amount of bonds or other assets from the open market, with the goal of increasing the money supply instead of decreasing the interest rate.

Round 3 of QE

The third round of quantitative easing, hence the term QE3, started in September 2012, with the Fed announcing it is buying $40 billion every month of mortgage-backed securities. In December 2012, the FOMC announced it is increasing the monthly bond-buying purchases from $40 billion to $85 billion.

This stimulus provided by the Fed brought additional liquidity to the market which helped stabilize the U.S. economy in the first months of 2013. It also propelled investments to other parts of the world, including the Philippines which is said to have benefited from the influx of foreign investments to the Philippine stock market in the past months. (See 1st Quarter 2013 Performance of Philippine Stocks)

Improving GDP, unemployment and inflation rates

The decision to taper the QE3 program is said to be caused by a recovering U.S. economy. Fed officials noted that America’s unemployment and inflation rates are within expectations and are showing signs of improvement.

The jobless rate in 2014 is estimated to be 7.2% to 7.3%, compared with 7.3% to 7.5% earlier forecasted in March. In 2014, the Fed expects the unemployment rate to fall further to 6.5% to 6.8%.

Core inflation, meanwhile, is expected to slowly rise — also a sign of an improving economy. Core inflation, which excludes in its basket items with volatile prices such as food and energy, is estimated to rise to 1.5% to 1.8% in 2014 and 1.7% to 2.0% in 2015.

The Fed also raised its expectations for the growth of the U.S. Gross Domestic Product (GDP) next year, from 2.9% to 3.4% in earlier forecasts to 3.0% to 3.5%.

Stocks, bond prices drop as markets react

Stock and bond markets slumped following the Fed’s announcement of the winding down of the QE3 stimulus. The three major stock indices in the U.S. — the Dow Jones industrial average, S&P 500, and NASDAQ Composite all dropped by more than 1% after the news came out.

Hardest hit were bonds whose prices dropped, sending bond yields to new highs. The yield on 10-year Treasury note rose 2.36%, the highest since March 2012, from 2.19% a day before.

On June 20, Philippine stocks were down 2.25%, losing 146 points at the opening bell.

Read these other interesting and useful articles:

About the Author

PSEi support seen at 6,200 and 6,000 amid weaker Peso

In a not-so-surprising move, the U.S. Federal Reserve (Fed) yesterday raised interest rates by 75 basis points (bps) or 0.75% in a bid to tame rising inflation in the United States. This was the third consecutive 0.75% rate hike by the Fed, which brings the federal funds rate, the central bank’s benchmark interest rate, to ... Read more

Official SWIFT Code of BDO, BPI, Metrobank, Philippine banks

When sending cash remittances or wire transfer to a bank account in the Philippines (such as BDO, BPI, Metrobank, Landbank, DBP, etc.), you’ll surely need the SWIFT Code of the bank. Look no further because you can find all the SWIFT Codes you need in this list! Make sure you’re using the right bank code ... Read more

How to Waive your Credit Card Annual Fee (BDO, BPI, Metrobank, RCBC, Citibank, UnionBank)

Without a doubt, one of the most annoying fees that credit cardholders have to pay is the annual fee. Majority of cardholders are familiar with this fee and majority of us likely pay this grudgingly year after year after year. In the case of my credit card with BPI (Bank of the Philippine Islands), I’m ... Read more

Why Filipinos do not become business owners or entrepreneurs

For a majority of Filipinos, entrepreneurship does not seem to be a typical, expected path. This is not surprising, considering that in school, students are primarily taught to become employees after graduation. Students train for years to become staff workers, reporting to a supervisor, and just waiting to receive their wages or salaries every month. ... Read more

My experience investing in Mutual Funds in the Philippines

I started investing in mutual funds when I was 22 years old. As an Overseas Filipino Worker (OFW) then, I was fortunate to be able to save some money at that young age because of my work abroad. One time while I was on vacation in the Philippines, I saw a large billboard in EDSA ... Read more

Income Tax Tables in the Philippines (2022)

The Philippines’ new tax reform bill, known as TRAIN or Tax Reform for Acceleration and Inclusion, was signed into law on December 19, 2017 and its implementation began on January 1, 2018. What are the new income tax rates under the TRAIN law? How will TRAIN affect income taxes of individuals and corporations? How is the ... Read more

PSE Stocks Performance under each Philippine President (1987-2021)

Did you know that Philippine stocks were able to achieve an astounding growth of 800% in a span of 30 years? From 1987 until 2018, the Philippine Stock Exchange index (PSEi) rose from 1,000 points to a peak of 9,000 points — generating a return of 800% over 30 years. (The PSEi is an index ... Read more

SSL 2022: Salary Increases for Teachers, Nurses, Gov’t Employees

Good news to all government employees! There’s a new round of salary increases beginning January 1, 2022! Millions of employees of the Philippine government — including public school teachers, nurses and staff of government hospitals, and workers in local and national government agencies, etc. — will be getting an automatic salary adjustment this 2022 under ... Read more

PSE Trading Hours in 2022: What time open, when closed?

Before you take the plunge into stock trading and investing, make sure you understand what stocks are and how the Philippine Stock Exchange (PSE) operates. Unlike other investments that are relatively safe, stock trading is risky and loss of money is a possibility. So before you deep dive into the exciting world of stock trading, ... Read more

Price Floor and Price Ceiling of PSE Stocks

Trading bands in the PSE come in two forms: Price Ceiling, or the upper price limit, and Price Floor, or the lower price limit.

5 thoughts on “U.S. Fed announces Quantitative Easing (QE3) tapering”

  1. I don?t even appreciate how I finished up here, but I believed this submit was great. I don’t know who you’re but definitely you might be going to a well-known blogger if you aren’t already 😉 Cheers!

  2. Greate pieces. Keep posting such kind of information on your site.
    Im really impressed by your site.
    Hi there, You have performed an incredible job. I will definitely digg it
    and in my view recommend to my friends. I am sure they’ll
    be benefited from this website.

  3. Does your site have a contact page? I’m having a tough time locating
    it but, I’d like to shoot you an email. I’ve got
    some ideas for your blog you might be interested in hearing.

    Either way, great blog and I look forward to seeing it expand
    over time.


Leave a Comment