Markets reacted positively to news yesterday the United
States Federal Reserve was planning to stop buying bonds in
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
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
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
Raising or lowering the interest on excess reserves could
encourage or discourage banks from holding money at the Fed,
Mr Timms said.