Fed keeps taps at full tilt for fear of curbing recovery
Surprised investors send US stocks to record THE US Federal Reserve unexpectedly refrained from reducing the $85 billion (R832bn) pace of monthly bond buying, saying on Wednesday that it needed more evidence of lasting improvement in the economy and warning that a rise in interest rates threatened to curb the expansion.
“Conditions in the job market are still far from what all of us would like to see,” chairman Ben Bernanke said at a press conference in Washington after a two-day meeting of the Federal Open Market Committee (FOMC). “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”
US stocks rose after the news, sending the Standard & Poor’s (S&P) 500 index to a record close on Wednesday, while treasuries and gold rallied as Bernanke stressed that the pace of bond buying would depend on economic data, and the Fed had no predetermined schedule for tapering the purchases that had pushed its balance sheet to $3.66 trillion.
“There is no fixed calendar schedule, I really have to emphasise that,” Bernanke said. “If the data confirm our basic outlook” for growth and the labour market, “then we could begin later this year”.
The S&P500 climbed 1.2 percent to close at 1 725.52 in New York on Wednesday. The yield on the 10-year treasury note fell 15 basis points to 2.7 percent. Spot gold soared 4.2 percent to $1 366.25 an ounce and oil rose more than 2.5 percent.
“It looks like the Fed has done a major reset in terms of expectations on what they need to see before they start to taper,” said Chris Rupkey, the chief economist for Bank of TokyoMitsubishi UFJ in New York.
The central bank’s statement left unchanged its outlook that its target interest rate would remain near zero “at least as long as” unemployment exceeded 6.5 percent, so long as the outlook for inflation was no higher than 2.5 percent.
Bernanke added that the first interest rate increase might not come until the jobless rate was “considerably below” 6.5 percent.
“Even after asset purchases are wound down,” Bernanke said, the “Fed’s rate guidance and its ongoing holdings of securities will ensure that monetary policy remains highly accommodative, consistent with an aggressive pursuit of our mandated objectives of maximum employment and price stability”.
Conditions in the job market are still far from what all of us would like to see.
Bernanke said the Fed could also specify that it would not tighten if inflation was too low. “An inflation floor is certainly something that could be a sensible modification or addition to the guidance,” he said.
Fed officials reduced their forecasts for US growth this year and next. They forecast gross domestic product to increase by between 2 percent to 2.3 percent this year, down from a June projection of 2.3 percent to 2.6 percent growth.
“They feel the risks are too great to taper now, and the economy is not growing as fast as they had hoped,” John Silvia, the chief economist at Wells Fargo Securities, said. “They are going to take a few more months and maybe start in December.”
Economists had forecast the FOMC would dial down monthly treasury purchases by $5bn, to $40bn, while maintaining its buying of mortgagebacked securities at $40bn, according to a survey.
Fed officials were spooked by an increase in bond yields that followed Bernanke’s comments in May that the Fed might step down the pace of purchases in the “next few meetings”, Scott Brown, the chief economist for Raymond James & Associates, said.
The yield on the 10-year treasury note had climbed almost 1 percentage point through Tuesday since Bernanke’s May 22 comments, with yields on September 6 exceeding 3 percent on an intraday basis for the first time since July 2011. That compared with 1.61 percent on May 1, and a record low 1.38 percent in July 2012.
“They were really surprised back in May and June by the market’s response to the initial talk of tapering,” Brown said. “The Fed’s view was that it’s the amount of asset purchases, not the monthly pace, that matters. In that case, it doesn’t matter whether they start tapering in September or December, but the markets decided it does, so it does matter.
“We’re seeing the reaction that bond yields are coming down, and that’s got to be helpful for their outlook.”
Kansas City Fed president Esther George dissented for the sixth meeting in a row, repeating that the quantitative easing policy risked creating financial imbalances.
Higher interest rates have started to take a toll on housing, one of the drivers of the expansion. A Commerce Department report on Wednesday showed that builders began work on fewer US homes in August than projected by economists.
Housing starts rose 0.9 percent to a 891 000 annual rate, following the prior month’s 883 000 pace that was weaker