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U.S. Fed surprises, sticks to stimulus, markets cheer

Reuters
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Chairman of the Federal Reserve Ben Bernankephoto:afp
Chairman of the Federal Reserve Ben Bernankephoto:afp

: The U.S. Federal Reserve defied investor expectations on Wednesday by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.

Investors responded by propelling U.S. stocks to record highs and driving down bond yields.

Yields on U.S. Treasury debt had risen over the summer on expectations the Fed would cut back its $85 billion a month in bond purchases that have been the cornerstone of its efforts to spur the economy.

Furthermore, Fed Chairman Ben Bernanke refused to commit to reducing the bond purchases this year, and instead went out of his way to stress the program was "not on a preset course." In June he had said the Fed expected to cut back before year end.

"There is no fixed calendar schedule. I really have to emphasize that," he told a news conference. "If the data confirm our basic outlook, if we gain more confidence in that outlook ... then we could move later this year."

The reaction in markets was swift and sharp.

The U.S. dollar fell to a seven-month low against major currencies and the price of gold, a traditional inflation hedge, soared more than 4.0 percent.

"The Federal Reserve remains quite concerned about the overall sluggishness of the economy, preferring to take the risk of being too loose for too long as opposed to tighten prematurely," said Mohamed El-Erian, co-chief investment officer at Pimco, which manages the world's largest mutual fund.

Some economists said it was possible the Fed might not begin to wind down its bond buying until after Bernanke's term as Fed chairman expires in January.

That would leave the tricky task of unwinding the stimulus to his successor, quite likely Fed Vice Chair Janet Yellen, who was identified by a White House official on Wednesday as the front-runner for the job.

Bernanke declined to comment on his future.Reuters


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