Last night marks the end of the long-awaited Federal Open Market Committee meeting as investors await clearer direction from the central bank. Markets which have been buoyed by the quantitative easing saw signs of fear when Chairman Ben Bernanke suggested tapering of the monthly stimulus on 22 May. Since that date, equity markets globally have seen a sell-off. (S&P 500 index -2.4%, STI -7%, HSI -9.8%, China A50 index -10%)

No changes to interest rates and monthly stimulus
In its policy statement, the FOMC has left both the interest rates and the monthly pace of bond purchases unchanged.
 
The committee expects the economy to grow at a rate of 3.5% next year and unemployment rate to decrease to 6.5% - 6.8% by the end of 2014. Previously, the growth forecast was 3% and the nation’s jobless rate in the month of May was 7.6%. In addition, they anticipate that the inflation rate will run at or below 2%.
 
If their forecast is accurate, the market can expect to see an increase in interest rates, which has been kept low (0 – 0.25%) for now. According to the Committee’s statement, the low interest rates “will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than 0.5% above the Committee’s 2% longer-run goal”.
 
Scale back to be seen later this year?
Chairman Ben Bernanke said that “downside risks to the outlook for the economy and the labour market have diminished” and hence, monthly bond-purchases of $85 billion will stay for the time being. However, they are looking to “moderate” the pace later this year and look to end if by mid 2014.
 
Still, nothing is set in stone and Bernanke said “if you draw the conclusion that I just said that our policies 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. If the economy does not improve along the lines that we expect, we will provide additional support”.
 
US investors last night were disappointed and the S&P 500 index slid 1.4%, the largest fall in two weeks.

Source: Macquarie Research - 20 Jun 2013