Tuesday 20 February 2018

US markets up as Fed pledges support after quantitative easing ends

Ben Bernanke, chairman of the US Federal Reserve, speaks during a press conference at the Fedreal Reserve in Washington yesterday. Photo: Bloomberg
Ben Bernanke, chairman of the US Federal Reserve, speaks during a press conference at the Fedreal Reserve in Washington yesterday. Photo: Bloomberg

The US Federal Reserve will end its second round of Quantitative Easing (QEII) on schedule in June, but said it would continue its support for the teetering US recovery after it cut its forecast for economic growth.

In a historic press conference by chairman Ben Bernanke at the end of a two-day meeting of it policy-making committee, Mr Bernanke said he intended to end its US$600bn (€406bn) bond-buying program in June as scheduled.

The programme is referred to as quantitative easing because it aims to stimulate the economy by easing access to cash in the economy as a result of the government printing money to buy bonds.

News that support will continue even after QEII ends buoyed markets last night. US stocks extended gains yesterday, with the main stock indexes near session highs after the Federal Reserve signalled it was willing to maintain its extensive support for the US economy.

The Fed acts as the US central bank. It said that economic recovery is proceeding at a "moderate pace", a slight change from a statement in March when it said the economy was on "firmer footing".

The Fed lowered its estimate for growth in 2011 to between 3.1pc and 3.3pc, down from 3.4pc to 3.9pc it had forecast in January.

It lowered its forecast for unemployment, but said joblessness will remain high over a three year forecast horizon.

Rising oil prices prompted the Fed to raise its estimate of inflation this year to a range of 2.1pc to 2.8pc.

However, the Fed said the surge in the cost of oil and other commodities was transitory and would not spark broader inflation.

"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," the Fed said.

There were few surprises in the Fed's statement and financial markets largely took it in stride.

Stock prices inched higher and the US dollar slipped while bonds were steady. Interest rate futures showed traders continued to bet that the Fed would hold off on raising rates until early 2012.

"On policy, the statement confirms that the bond buying is over but otherwise leaves everything on the table,'" said Stephen Stanley, chief economist at Pierpont Securities.

The statement marked the conclusion, for now, of the massive expansion of the Fed's balance sheet that helped pull the economy out of its deep recession. Hints that even without the bond-buying the Fed is committed to economic stimulus should ease fears that bonds in general will fall without the Fed firepower soaking up paper.

The bigger question for investors, however, is when will the Fed actively turn to tighten monetary policy by raising interest rates. (Reuters)

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