- POSTED: 19 Sep 2013 02:17
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The Federal Reserve on Wednesday left its $85 billion a month stimulus programme in place, surprising economists and markets expecting a reduction that would confirm a strengthening US economy.
WASHINGTON: The Federal Reserve on Wednesday left its $85 billion a month stimulus programme in place, surprising economists and markets expecting a reduction that would confirm a strengthening US economy.
Fed policy-makers cut their growth forecast for this year and next, and said they wanted to further gauge the impact of ongoing government spending cuts and a spike in interest rates in the past four months on the economy.
In addition, Fed Chairman Ben Bernanke said, the Federal Open Market Committee (FOMC) was wary of possibly "very serious consequences for the financial markets" of the brewing political battle in Washington over a new budget and the US debt ceiling.
"The Federal Reserve's policy is to do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely," he said.
Bernanke said that the FOMC could still begin reducing the $85 billion a month bond-buying programme, aimed at holding long-term interest rates low, this year, but only if the outlook for the economy strengthens.
"There is no fixed calendar," Bernanke told reporters in a news conference after a two-day FOMC policy meeting.
"If the data confirm our basic outlook, if we gain more confidence in that outlook... then we could move later this year," he said.
"But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data."
Markets, which had anticipated the beginning of the end of the quantitative easing (QE) bond-buying programme since May, reacted sharply.
Stocks soared on the news of the Fed's continuing QE injections into the economy, with the Dow Jones Industrial Average and S&P 500 rocketing up around 1 percent to new record closing highs.
Bond yields plummeted, the benchmark 10-year US Treasury sinking to 2.70 percent from 2.87 percent from just before the Fed announcement.
The dollar sank as well. The euro bought $1.3510, up from $1.3340, and the dollar fell to 98.01 yen from 99.33 yen.
It was the dollar's lowest level against the euro since February.
The FOMC said in its policy statement that, since its July meeting, the economy continued to grow at a "modest" pace and appeared to be holding up against the sharp "sequester" spending cuts by the federal government.
Nevertheless, it said, it was holding back on reducing the QE programme "to await more evidence that progress will be sustained."
"The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall."
"But the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."
Reflecting those concerns, the FOMC reduced its 2013 growth forecasts by 0.3 percentage point to a range of 2.0-2.3 percent, and lowered its prediction for next year to 2.9-3.1 percent.
And FOMC members reiterated that they only expected to begin truly tightening monetary policy, by lifting the benchmark federal funds rate, in 2015.
The rate has been locked at an ultra-low 0.0-0.25 percent level since the end of 2008.
Bernanke had signaled in May and June that the FOMC would ratchet down the QE program from as early as this month, with the expectation of winding it up completely by mid-2014.
For most analysts, the debate was only over how much the bond purchases would be cut - with the guesses from $5 billion a month to $25 billion a month.
The prospects of the removal of that much liquidity from the economy had already pushed up interest rates, with average 30-year home mortgage rates jumping in four months from 3.32 percent to 4.48 percent.
That change has already slowed the rebound in the housing market, which has been crucial to the economy's recovery.
But another key focus has been unemployment, which, at August's 7.3 percent rate, remains "elevated", according to the Fed.
But the rate has fallen steadily from 8.1 percent in August 2012, and appeared to be closing on the 7.0 percent threshold Bernanke had cited for ending the QE programme entirely.
Bernanke however argued that the jobless rate does not tell the whole story - that much of the fall has come from falling participation in the labour force.
"The unemployment rate understates the amount, of sort, of true unemployment, if you will, in the economy," he said.
"We have seen ongoing declines in labour force participation, which likely reflects discouragement on the part of many potential workers, as well as longer-term influences, such as the aging of the population."