US Fed surprises as Ben Bernanke sticks to economic stimulus, cuts growth outlook

Sep 19 2013, 08:52 IST
Comments 0
US Federal Reserve Board Chairman Ben Bernanke holds a news conference following the Fed's two-day Federal Open Market Committee meeting in Washington. (Reuters) US Federal Reserve Board Chairman Ben Bernanke holds a news conference following the Fed's two-day Federal Open Market Committee meeting in Washington. (Reuters)
SummaryFed cuts forecast for 2013 economic growth to 2-2.3% range from June estimate of 2.3-2.6%.

The US Federal Reserve said on Wednesday that it would continue buying bonds at an $85 billion monthly pace for now, expressing concerns that a sharp rise in borrowing costs in recent months could weigh on the economy.

The decision surprised financial markets, which were braced for a modest cut in the central bank's economic stimulus, and Fed Chairman Ben Bernanke refused to commit to a tapering of purchases later this year, as he had previously suggested.

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

Related: dollar holds near 4-week low as Fed stimulus decision looms

Stocks rallied on the US central bank's decision, with the S&P 500 index hitting a record high. The dollar fell to a seven-month low against the euro, while prices for US government bonds rose sharply. The price of gold, a traditional inflation hedge, also shot higher.

Related: US stimulus pullback dominates G20 economy talks

"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, which manages the world's largest mutual fund.

In fresh quarterly projections, the Fed cut its forecast for 2013 economic growth to a 2 per cent to 2.3 per cent range from a June estimate of 2.3 per cent to 2.6 per cent. The downgrade for next year was even sharper.

It cited strains in the economy from tight fiscal policy and higher mortgage rates as it explained why it decided to maintain asset purchases at the current pace.

"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.

MAKING SLOW PROGRESS

Nevertheless, the Fed said the economy was still making progress despite tax hikes and budget cuts in Washington.

"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.

And policymakers made clear they were still mulling exactly when to ratchet back their

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...