Markets welcome move by Fed

Markets reacted positively to news yesterday the United States Federal Reserve was planning to stop buying bonds in October.

The New Zealand and Australian dollars and the euro all rose against the US dollar, putting further pressure on exporters.

The Federal Reserve's minutes for the June 17-18 meeting indicated the Fed envisioned using overnight repurchase agreements in tandem with the interest it pays banks on excess reserves to set a ceiling and floor for its target interest rates.

Craigs Investment Partners broker Chris Timms said the minutes showed the Fed participants generally agreed its monthly bond purchases would end in October, with a final reduction of $US15 billion ($NZ17 billion) in the amount bought each month of US treasury bonds and mortgage-backed securities.

The Fed had been tapering its quantitative easing programme by $US10 billion at each meeting this year, bringing monthly bond purchases from $US85 billion to $US35 billion in June.

''Fed officials expressed overall confidence moderate economic growth will continue and unemployment and inflation will gradually move towards the central bank's targets. If anything, there was concern recent low volatility in financial markets showed investors were not factoring in sufficient uncertainty,'' Mr Timms said.

Analysts found little in the minutes to suggest the Fed would move forward its first interest rate increase, expected in the middle of next year.

By removing the uncertainty of higher interest rates in the near term, investors felt more comfortable investing in sharemarkets, he said.

Higher interest rates were generally seen as bad for markets.

The Fed's exit strategy was complicated by the fact its massive stimulus programmes had flooded financial markets with cash and stifled daily participation in the Fed funds market traditionally used to manage interest rates, he said.

The new reverse repurchasing facility and the interest on overnight reserves were meant to give the Fed new tools to influence rates once policymakers agreed they should start to rise again.

Raising or lowering the interest on excess reserves could encourage or discourage banks from holding money at the Fed, Mr Timms said.

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