Tuesday 12 December 2017

Fed to keep economic stimulus going

The Federal Reserve has said it will continue to buy 85 billion dollars a month in bonds
The Federal Reserve has said it will continue to buy 85 billion dollars a month in bonds

The Federal Reserve has decided against reducing its stimulus for the US economy and announced it will continue to buy 85 billion dollars (£53 billion) a month in bonds because it thinks the economy still needs the support.

The Fed said in a statement that it will maintain the pace of its bond purchases while it awaits conclusive evidence that the economy will strengthen. It issued its statement while also downgrading its outlook for economic growth this year and next.

The bond purchases are intended to keep long-term borrowing rates low to boost spending and economic growth.

"We're in a slow-growth economy with high unemployment and low inflation," said Greg McBride, senior financial analyst at Bankrate.com. "There's no specific catalyst for the Fed to remove stimulus."

Stocks spiked after the Fed released the statement at the end of its two-day policy meeting. The Dow Jones industrial average, which had been down before the statement was issued at 2pm Eastern time, was up more than 100 points half an hour later.

In the statement, the Fed said that the economy is growing moderately and that some indicators of the job market have shown improvement. But it noted that rising mortgage rates and government spending cuts are restraining growth.

The Fed also repeated that it plans to keep its key short-term interest rate near zero at least until unemployment falls to 6.5%, down from 7.3% last month. In the Fed's most recent forecast, unemployment could reach that level as soon as late 2014.

Many thought the Fed would scale back its purchases. But interest rates have jumped since May, when chairman Ben Bernanke first said the Fed might slow its bond buys later this year. But Mr Bernanke cautioned that the reduction would hinge on the economy showing continued improvement.

In its statement, the Fed says that the rise in interest rates "could slow the pace of improvement in the economy and labour market" if they are sustained. The Fed also lowered its economic growth forecasts for this year and next year slightly, likely reflecting its concerns about interest rates.

The statement was approved on a nine to one vote. Esther George, president of the Federal Reserve Bank of Kansas City, dissented for the sixth time this year. She repeated her concerns that the bond purchases could fuel the risk of inflation and financial instability.

Press Association

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