US Fed to keep asset purchases steady

Investors react to surprise decision by pushing stocks to record high

Federal Reserve chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington, yesterday. Photograph: Doug Mills/The New York Times

Federal Reserve chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington, yesterday. Photograph: Doug Mills/The New York Times

Thu, Sep 19, 2013, 01:00

The US Federal Reserve last night sprung a surprise on markets by keeping its asset purchases steady at $85 billion (€63 billion) a month as it cut growth forecasts for 2013.

Investors reacted by pushing stocks to a record, while gold and oil prices shot higher as bond yields and the dollar dropped.

“This is not what we expected. However, it is, from the Fed’s point of view, understandable,” said Dan Greenhaus, chief global strategist at BTIG.

The S&P 500 rose 1.1 per cent to a new all-time high of 1,723.31 in the first 30 minutes of trading after the statement, after trading a little lower ahead of the news.

Despite expectations that the Fed would start to taper its third round of quantitative easing, the rate-setting federal open market committee said it would “await more evidence that progress will be sustained before adjusting the pace of its purchases”.

The decision suggests that the Fed was alarmed by the sharp rise in long-term interest rates that followed its June announcement of a likely scenario for tapering its QE3 buying programme, and by the prospect of a big fiscal showdown in US Congress in the coming weeks.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market,” said the open market committee in its statement.

The decision to delay tapering sent a strong signal that the Fed is still concerned about the economy and wants to see lower long-term interest rates.


More evidence
A taper is still likely in the coming months, since the Fed explicitly said it was waiting for more evidence of sustained progress before acting. “Asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases,” it said.

The Fed will continue to purchase mortgage-backed securities at a pace of $40 billion a month and treasury securities at a pace of $45 billion a month.

It made no change to its 6.5 per cent unemployment rate threshold for a rise in interest rates. The vote for the decision was 9-1 in favour. – (Copyright The Financial Times Limited 2013)