WASHINGTON: The Federal Reserve has decided against reducing its stimulus for the US economy, saying it will continue to buy $85bn a month in bonds because it thinks the economy still needs the support.
The Fed said in a statement yesterday that it held off on tapering because it wants to see more conclusive evidence that the recovery will be sustained.
Stocks spiked after the Fed released the statement at the end of its two-day policy meeting.
In the statement, the Fed said that the economy is growing moderately and that some indicators of labour market conditions have shown improvement. But it noted that rising mortgage rates and government spending cuts are restraining growth. The bond purchases are intended to keep long-term loan rates low to spur borrowing and spending.
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 percent, down from 7.3 percent 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 Fed Chairman Ben Bernanke first said the Fed might slow its bond buys later this year. But Bernanke cautioned that the reduction would hinge on the economy showing continued improvement. In its statement, the Fed said 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 9-1 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.
The decision to maintain its stimulus follows reports of sluggish economic growth. Employers slowed hiring this summer, and consumers spent more cautiously.
Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans. But the average rate on the 30-year mortgage has jumped more than a full percentage point since May and was 4.57 percent last week — just below the two-year high.
Meanwhile, crude oil futures on both sides of the Atlantic extended intraday gains yesterday after the US central bank said it would leave its monetary stimulus program unchanged.
Oil prices had rallied earlier in the day after data showed US crude oil inventories fell to their lowest level since March 2012. Supplies at the Cushing, Oklahoma, storage hub fell to their lowest level in 19 months.
Brent oil for November delivery traded at a high of $110.15 per barrel after the Fed statement and was last trading $1.58 higher at $109.77 at 2.08pm EDT (1808 GMT), after settling at a six-week low in the previous session.
U S crude oil for October delivery was $2.02 higher at $107.44, after hitting a high of $107.90.
The unemployment rate is now 7.3 percent, the lowest since 2008. Yet the rate has dropped in large part because many people have stopped looking for work and are no longer counted as unemployed — not because hiring has accelerated. Inflation is running below the Fed’s 2 percent target.