US to scale back economic stimulus

A turning point for the world’s biggest economy is expected this week when US policymakers begin the process of scaling back stimulus efforts.

US to scale back economic stimulus

A turning point for the world’s biggest economy is expected this week when US policymakers begin the process of scaling back stimulus efforts.

Analysts believe that the US Federal Reserve will slow the rate of its monthly asset purchases from the current $85bn a month as members respond to signs of gathering momentum in the US economy.

The forecast cut of $10bn in the quantitative easing (QE) programme on Wednesday will represent the first shift in the direction of policy since the Federal Reserve last raised interest rates in 2006.

The prospect of tapering has caused volatility in markets ever since Federal Reserve chairman Ben Bernanke suggested in May that asset purchases might be slowed later in the year.

However, it is likely that investors have now factored in the prospect of a shift in US monetary policy, although there is still a chance it may be delayed beyond this week’s meeting.

The Syria crisis and the ongoing battle over extending the US debt ceiling have added to uncertainty over when the Federal Reserve will act on QE tapering.

The central bank has already said it will not raise interest rates until unemployment drops to 6.5%.

The jobless rate is currently 7.3% but there are signs of economic improvement after the US grew at an annual pace of 2.5% in the second quarter.

ING economist James Knightley is forecasting a monthly cut of 10 billion US dollars in asset purchases this week. He added: “The Fed is likely to retain a relatively dovish stance, emphasising that the tapering will be slow and steady and that actual interest rate hikes are a long way off.”

Tapering will strengthen the US dollar against the pound, helping boost UK exports, but raise inflation prospects because oil is priced in dollars.

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