News Column

Fed Will Keep Buying Bonds for Now; Markets Dip

June 19, 2013
money news

The US Federal Reserve could begin to slow its purchase of bonds later this year with an eye toward ending the programme by mid-2014, Chairman Ben Bernanke said Wednesday.

The aim would be to end its bond buying effort as unemployment reaches the vicinity of 7 per cent, he told a press conference as he provided clarity about the status of the programme in place since last year.

The US Federal Reserve said it would for now continue its bond buying programme to bolster the US economy and keep its benchmark interest rate at record low levels.

Speculation about whether the central bank would continue with its 85-billion-dollar-a-month bond buying programme had left world bond and equities markets yo-yoing in recent weeks.

The Fed signalled that economic and labour conditions had continued to improve since the autumn and that it would continue to monitor the situation as it weighs the future of the stimulus programme.

Bernanke stressed however that an end to the purchases would be a response to market conditions with no set date. If conditions improve more quickly, the Fed could ease its purchases more quickly, but would delay the move if economic conditions worsened, he said.

The Fed however would continue to hold the bonds it had already purchased.

"To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes," he said.

Markets declined following Bernanke's comments, with the Standard & Poor's 500 Index and the Dow Jones Industrial Average both dipping 1.4 per cent and the technology-heavy Nasdaq falling 1.1 per cent.

The Fed lowered its forecasts for unemployment and inflation, predicting unemployment of 7.2 to 7.3 per cent this year compared to a projection of 7.3 to 7.5 per cent in March figures. Inflation was projected at 0.8 to 1.2 per cent for the year, down from 1.3 to 1.7 per cent.

It forecast the economy would grow 2.3 to 2.6 per cent for the year, down slightly from a projection of 2.3 to 2.8 per cent in March.

The central bank also said it would maintain its key interest rate near zero, a rate it has maintained since December 2008.

Bernanke also stressed that policy would continue for some time, noting "any need to consider applying the breaks by raising short-term rates is still far in the future."

The unprecedent slack money supply has since been supplemented by Fed buying of US government bonds - so-called quantitative easing - in effect, printing money and shoveling it into the private sector in hopes of spurring investment.

The latest round of bond buying was launched in September at a pace of 85 billion dollars a month, or about 1 trillion dollars a year in the 16-trillion-dollar US economy.

The Fed again said it was "prepared to increase or reduce the pace" of its purchases of government bonds "to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes."

Previous Fed policy language had not directly stated a willingness to raise its pace of bond purchases above the current 85 billion dollars a month. The unconventional monetary policy is intended to depress long-term interest rates.

US unemployment edged up to a seasonally adjusted 7.6 per cent in May from April's four-year low of 7.5 per cent.

Government surveys showed modestly expanding payrolls, while discouraged workers resuming efforts to find jobs. During the slow economic recovery since the 2007-09 US recession, many people unable to find jobs quit looking, removing them from the official unemployment rate.

Economic expansion picked up in the January-March quarter to an annualized 2.4 per cent, according to the Commerce Department, after fourth-quarter growth stalled out at just 0.4 per cent.

Bernanke declined to comment on speculation that he would leave the US central bank when his term ends early next year.

"I don't have anything for you on my personal plans," he told the press conference.

US President Barack Obama hinted in a television interview Monday that Bernanke might go, noting he had "already stayed a lot longer than he wanted or he was supposed to."

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Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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