Fed QE Trim Prompted Earlier Tightening Expectations, Study Says

The Federal Reserve’s decision in December to begin scaling back its monthly bond purchases prompted investors to expect an earlier increase in the main interest rate even as Fed officials repeatedly said tapering isn’t tightening, a regional Fed bank study showed.

“As of the end of 2013, the expected exit date has moved forward notably since September 2013 despite only minor changes between September and December in FOMC participants’ projections of appropriate future monetary policy,” Jens Christensen, a senior economist at the San Francisco Fed, said in research released today.

The findings highlight the challenges in Fed communications as the central bank shifts its focus from buying bonds to communicating its intent to maintain low interest rates. The Federal Open Market Committee in December strengthened its commitment to hold down borrowing costs, saying officials expect to keep zero rates “well past the time” the unemployment rate falls below their 6.5 percent threshold.

The jobless rate fell to 6.6 percent in January, according to Labor Department figures released last week.

As of Dec. 27, investors expected the Fed to begin tightening policy around March 2015, according to Christensen’s analysis of Treasury yield curves. The analysis showed investors anticipated a one-in-three chance the Fed will keep interest rates near zero beyond 2015, Christensen said.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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