This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/business/2013/sep/18/federal-reserve-maintains-stimulus-ben-bernanke

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Federal Reserve maintains bond-buying stimulus in surprise move Federal Reserve maintains bond-buying stimulus in surprise move
(about 2 hours later)
The Federal Reserve surprised investors on Wednesday by announcing that the US economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program. US stock markets hit record highs Wednesday as the Federal Reserve surprised investors by announcing that the economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program.
After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets, but underlined the precarious state of the economy in the US. After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets which had sunk ahead of the news on fears that the Fed was preparing to "taper" the so-called quantitative easing (QE) program. Even the threat of a slight reduction in the stimulus spooked the markets in July.
Analysts had expected the Fed to announce that it was preparing to "taper" its quantitative easing programme, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment. But the news also underlined the precarious state of the wider economy as a row over the US's debt limit threatens a government shutdown. In a press conference Ben Bernanke, Fed chairman, warned that the current row could have "very serious consequences".
Fed chairman Ben Bernanke signalled in July that the stimulus would be probably cut back, and that such a move could be announced in September. But the FOMC opted to leave the scheme intact for now. Analysts had expected the Fed to announce that it was preparing to trim back QE, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment.
Bernanke signalled in July that the scheme would be cut back and that such a move could be announced in September. But the FOMC concluded to leave the scheme intact for now.
The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
It would continue to closely monitor economic and financial developments in coming months, and continue its purchases of Treasury- and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability." It would continue to closely monitor economic and financial developments in coming months and continue its purchases of Treasury and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability".
The FOMC said fiscal policy was "restraining economic growth", and expressed concern about rising mortgage rates and the still high unemployment rate. Bernanke warned that the political clash over the US's debt limit and the threat of a government shutdown were all likely to harm the economy. "A government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy," he said.
Bernanke has linked any tapering of the QE policy to a sustained decline in the unemployment rate. US unemployment dipped to 7.3% last month, down from 8.1% a year ago. But the pace of job recovery remains sluggish, and the latest drop was driven in part by people deciding to leave the workforce. The FOMC said fiscal policy was "restraining economic growth" and expressed concern about rising mortgage rates and the still high unemployment rate. Bernanke said the FOMC's ability to mitigate the impact of a debt ceiling crisis was "very limited".
The labour force participation rate slumped to 63.2%, its worst reading in 35 years. Bernanke has linked any tapering of the QE policy to a sustained decline in the unemployment rate. US unemployment dipped to 7.3% last month, down from 8.1% a year ago. But the pace of job recovery remains sluggish and the latest drop was driven in part by people deciding to leave the workforce. The labour force participation rate slumped to 63.2%, its worst reading in 35 years.
Only one member of the FOMC, Esther George, the chief executive of the Federal Reserve Bank of Kansas City, voted against the decision not to cut back on QE. Only one member of the FOMC, Esther George, chief executive of the Federal Reserve Bank of Kansas City, voted against the decision not to cut back on QE. She has been a persistent critic of the scheme. According to the Fed, George "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations".
George has been a persistent critic of QE. According to the Fed, she "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations." US stock markets soared to record highs shortly after its release. Both the Dow Jones and S&P 500 set new records after the news. The Dow closed up over 147 points at 15676.94, the 31st time this year it has set a new record. Oil and gold prices also rose. The yields for the benchmark 10-year Treasury note sunk and the dollar slumped to a seven month low against the euro.
US stock markets had dipped before the announcement, but soared soon after, with all the major indices recovering their losses in the minutes after the announcement. Bernanke was due to give a press conference later on Wednesday to flesh out the Fed's decision. President Barack Obama is now assessing potential successors and Bernanke's second term ends in January. On Sunday former Treasury secretary Larry Summers withdrew from the race leaving vice-chairman Janet Yellen seen as most likely to succeed to the post. Bernanke declined to comment on the succession. "I'd prefer not to talk about my plans at this point," he said.
The statement made no mention of Bernanke's future plans. The Fed chairman has made clear that he does not want to serve a third term and Barack Obama is currently assessing potential successors. On Sunday, former Treasury secretary Larry Summers withdrew from the race leaving vice chairman Janet Yellen seen as most likely to succeed to the post. The Fed's move comes as the US faces a potentially disastrous row over increasing its borrowing limits. In 2011 a standoff in Congress over the debt ceiling led to a historic downgrade of US debt and panic on the financial markets.
Bernanke has avoided questions about his plans at previous press conferences. Economists expected him to do the same Wednesday in what will likely be his penultimate FOMC briefing. Obama accused Republicans of trying to "extort" him Tuesday by holding up negotiations unless he is prepared to amend or scarp his landmark healthcare reforms, the Affordable Care Act. Republican House speaker John Boehner hit back Wednesday calling Obamacare "a train wreck", as other party leaders set out further terms and conditions for raising the limit. The two sides are now at an impasse just days before the 30 September deadline to pass a government funding bill.
"I think he is most likely to want to keep the focus on policy," said Paul Dales at Capital Economics. The government reached its $16.7tn debt limit in May and has been employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers, to stay below the line. But Treasury secretary Jack Lew has warned that the government will run out of room to manoeuvre in October and will be unable to meet its obligations.
The Fed's move comes as the US faces a potentially disastrous row over increasing its borrowing limits. In 2011, a standoff in Congress over the debt ceiling led to a historic downgrade of US debt, and panic on the financial markets. On Tuesday Lew warned Congress again that a prolonged argument over the debt limit could do lead the US to default on its debts and irrevocably damage to the economy. "We cannot afford for Congress to gamble with the full faith and credit of the United States," Lew told the Economic Club of Washington.
Obama accused Republicans of trying to "extort" him Tuesday by holding up negotiations unless he is prepared to amend or scarp his landmark Affordable Care Act.
Republican speaker John Boehner hit back Wednesday calling "Obamacare" "a train wreck," as other party leaders set out further terms and conditions for raising the limit. The two sides are now at an impasse just days before the September 30 deadline to pass a government funding bill.
The government reached its $16.7tn debt limit in May and has been employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers, to stay below the line. But Treasury secretary Jack Lew has warned that the government will run out of room to manoeuver in October and will be unable to meet its obligations.
On Tuesday, Lew warned Congress again that a prolonged argument over the debt limit could lead the US to default on its debts, and cause irrevocable damage to the economy. "We cannot afford for Congress to gamble with the full faith and credit of the United States," Lew told the Economic Club of Washington.
A default would likely cause turmoil on world stock markets and a sharp rise in interest rates. Lew repeated a warning he made last month that the Treasury would soon be left with only around $50bn in cash on hand. The Treasury pays investors about $100bn to investors every Thursday that investors immediately lend back to the government, a process known as rolling over the debt.A default would likely cause turmoil on world stock markets and a sharp rise in interest rates. Lew repeated a warning he made last month that the Treasury would soon be left with only around $50bn in cash on hand. The Treasury pays investors about $100bn to investors every Thursday that investors immediately lend back to the government, a process known as rolling over the debt.
"If US bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance," Lew said."If US bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance," Lew said.
Default could come soon after that and would likely rock Wall Street and lead to a sharp rise in interest rates.Default could come soon after that and would likely rock Wall Street and lead to a sharp rise in interest rates.
Our editors' picks for the day's top news and commentary delivered to your inbox each morning.Our editors' picks for the day's top news and commentary delivered to your inbox each morning.