Fri, Sep 20, 2013 - Page 1 News List

Fed sticks to stimulus, cuts economic forecasts

‘NO FIXED CALENDAR’:The US central bank cited tight fiscal conditions and higher mortgage rates as reasons why it decided not to cut back on asset buying

Reuters, WASHINGTON

The US Federal Reserve defied investor expectations on Wednesday by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.

Investors responded by propelling US stocks to record highs and driving down bond yields. Yields on US Treasury debt had risen over the summer on expectations the Fed would cut back its US$85 billion a month in bond purchases that have been the cornerstone of its efforts to spur the economy.

Furthermore, Federal Reserve Chairman Ben Bernanke refused to commit to reducing the bond purchases this year and instead went out of his way to stress the program was “not on a preset course.”

He said in June the Fed expected to cut back before the end of the year.

“There is no fixed calendar schedule. I really have to emphasize that,” Bernanke told a press conference. “If the data confirm our basic outlook, if we gain more confidence in that outlook ... then we could move later this year.”

The reaction in markets was swift and sharp. The US dollar fell to a seven-month low against major currencies and the price of gold, a traditional inflation hedge, soared more than 4 percent.

“The Federal Reserve remains quite concerned about the overall sluggishness of the economy, preferring to take the risk of being too loose for too long as opposed to tighten prematurely,” said Mohamed El-Erian, co-chief investment officer at PIMCO.

Some economists said it was possible the Fed might not begin to wind down its bond buying until after Bernanke’s term expires in January. That would leave the tricky task of unwinding the stimulus to his successor, quite likely Federal Reserve Vice Chairperson Janet Yellen, who was identified by a White House official on Wednesday as the front-runner for the job.

Bernanke declined to comment on his future, but said he hoped to have more information soon.

In fresh quarterly forecasts, the Fed cut its projection for this year’s economic growth in the US to a 2 percent to 2.3 percent range from a June estimate of 2.3 percent to 2.6 percent. The downgrade for next year was even sharper.

It cited strains in the economy from tight fiscal policy and higher mortgage rates in explaining why it decided not to cut back on its asset purchases.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” it said in a statement.

Nevertheless, it said the economy was still making progress, despite higher tax increases and the budget cuts in Washington that were part of the “sequester” implemented by the US Congress.

“Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy,” it said.

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