Shocker fear abates as US Federal Reserve maintains strong stimulus

Oct 31 2013, 10:50 IST
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US Federal Reserve sounds a bit less optimistic about growth as it announces plans to keep buying $85 bn in bonds per month. US Federal Reserve sounds a bit less optimistic about growth as it announces plans to keep buying $85 bn in bonds per month.
SummaryFear and hope: US Federal Reserve hinting about tapering had wrecked financial markets recently.

The US Federal Reserve extended its support for a soft economy on Wednesday, sounding a bit less optimistic about growth as it announced plans to keep buying $85 billion in bonds per month, putting all talk about tapering to rest, for now.

In announcing the decision, the US Fed nodded to weaker economic signals that have been due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.

The central bank noted that the recovery in the housing market had lost some steam and suggested some frustration at how slowly the labour market was healing.

However, it also dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.

"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."

The decision on bond buying was widely expected and the US Fed's statement differed only slightly from the economic assessment it delivered after its last meeting in September.

US stocks sold off slightly, while the dollar climbed against the euro and the yen. Prices of US Treasuries turned negative, pushing yields higher.

"On balance, the US Fed's statement was slightly less dovish than expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. He cited the central bank's abandonment of a phrase that expressed concern about an earlier tightening in financial conditions, including higher mortgage rates, which other economists also saw as fractionally hawkish.

Still, the US Fed tempered its description of the labour market to take into account a recent weakening in jobs figures, saying only that there had been "some" further improvement.

"Until the economic data strengthens, and strengthens meaningfully, I think expectations for tapering (the bond purchases) are going to remain subdued," said Krishna Memani, chief investment officer at Oppenheimer Funds in New York.

He said there were only "modest" chances the Fed would reduce its buying at its next meeting in December.


The US Fed shocked financial markets last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on the stimulus. Its caution has since been vindicated.

Consumer and business confidence has been dented by the bitter political fight that triggered the government

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