The Federal Reserve surprised investors on Wednesday by announcing that the US economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program.
After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets, but underlined the precarious state of the economy in the US.
Analysts had expected the Fed to announce that it was preparing to "taper" its quantitative easing programme, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment.
Fed chairman Ben Bernanke signalled in July that the stimulus would be probably cut back, and that such a move could be announced in September. But the FOMC opted to leave the scheme intact for now.
The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
It would continue to closely monitor economic and financial developments in coming months, and continue its purchases of Treasury- and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability."
The FOMC said fiscal policy was "restraining economic growth", and expressed concern about rising mortgage rates and the still high unemployment rate.
Bernanke has linked any tapering of the QE policy to a sustained decline in the unemployment rate. US unemployment dipped to 7.3% last month, down from 8.1% a year ago. But the pace of job recovery remains sluggish, and the latest drop was driven in part by people deciding to leave the workforce.
The labour force participation rate slumped to 63.2%, its worst reading in 35 years.
Only one member of the FOMC, Esther George, the chief executive of the Federal Reserve Bank of Kansas City, voted against the decision not to cut back on QE.
George has been a persistent critic of QE. According to the Fed, she "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."
US stock markets had dipped before the announcement, but soared soon after, with all the major indices recovering their losses in the minutes after the announcement. Bernanke was due to give a press conference later on Wednesday to flesh out the Fed's decision.
The statement made no mention of Bernanke's future plans. The Fed chairman has made clear that he does not want to serve a third term and Barack Obama is currently assessing potential successors. On Sunday, former Treasury secretary Larry Summers withdrew from the race leaving vice chairman Janet Yellen seen as most likely to succeed to the post.
Bernanke has avoided questions about his plans at previous press conferences. Economists expected him to do the same Wednesday in what will likely be his penultimate FOMC briefing.
"I think he is most likely to want to keep the focus on policy," said Paul Dales at Capital Economics.
The Fed's move comes as the US faces a potentially disastrous row over increasing its borrowing limits. In 2011, a standoff in Congress over the debt ceiling led to a historic downgrade of US debt, and panic on the financial markets.
Obama accused Republicans of trying to "extort" him Tuesday by holding up negotiations unless he is prepared to amend or scarp his landmark Affordable Care Act.
Republican speaker John Boehner hit back Wednesday calling "Obamacare" "a train wreck," as other party leaders set out further terms and conditions for raising the limit. The two sides are now at an impasse just days before the September 30 deadline to pass a government funding bill.
The government reached its $16.7tn debt limit in May and has been employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers, to stay below the line. But Treasury secretary Jack Lew has warned that the government will run out of room to manoeuver in October and will be unable to meet its obligations.
On Tuesday, Lew warned Congress again that a prolonged argument over the debt limit could lead the US to default on its debts, and cause irrevocable damage to the economy. "We cannot afford for Congress to gamble with the full faith and credit of the United States," Lew told the Economic Club of Washington.
A default would likely cause turmoil on world stock markets and a sharp rise in interest rates. Lew repeated a warning he made last month that the Treasury would soon be left with only around $50bn in cash on hand. The Treasury pays investors about $100bn to investors every Thursday that investors immediately lend back to the government, a process known as rolling over the debt.
"If US bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance," Lew said.
Default could come soon after that and would likely rock Wall Street and lead to a sharp rise in interest rates.
(c) 2013 Guardian Newspapers Limited.
Original headline: Federal Reserve maintains bond-buying stimulus in surprise move
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