Fed surprises, sticks to stimulus as it cuts growth outlook
WASHINGTON — The United States Federal Reserve said yesterday (Sept 18) that it would continue buying bonds at an US$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 emphasise 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.”
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.
“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 Mr 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 labour 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.