Fed Surprises Markets by Sticking with Its Stimulus ; U.S. Central Bank Delays Action on Tighter Money, Citing Economic Doubts

Article excerpt

In a surprise move that could have global financial implications the Federal Reserve on Wednesday postponed an expected retreat from its long-running stimulus campaign.

In a surprise move that could have global financial implications, the Federal Reserve on Wednesday postponed an expected retreat from its long-running stimulus campaign, saying that it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth.

Since the Fed chairman, Ben S. Bernanke, had indicated in June that a retreat from the U.S. stimulus program might be coming, interest rates around the world had crept up, threatening any signs of an economic rebound and causing significant amounts of money to leave India and other emerging markets in search of safer investment returns in the West. The move Wednesday by the Fed, which happened after stock markets were closed in Asia and Europe, could alter the global investment calculus yet again.

On Wall Street, where stocks had been trading in negative territory before the Fed's announcement, the main indexes immediately headed up. The Dow Jones industrial average was up nearly 100 points in the first few minutes after the announcement.

As congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again "is restraining economic growth," threatening to undermine what the central bank had described just months ago as an economic recovery that was gaining strength.

The Fed's decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its purchases of government bonds and mortgage securities by the end of the year, the Fed noted Wednesday.

"The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market," it said in a statement released after a regular two-day meeting of its policy-making committee.

The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short- term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.

The statement said the committee sees recent economic data "as consistent with growing underlying strength in the broader economy." However, the statement continued, "The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years.

The Fed's decision to delay action may come as a relief in Europe, where there have been fears of repercussions that could undercut a tentative economic recovery.

Since Mr. Bernanke indicated in June that a tapering of the Fed's monetary stimulus might be coming, the borrowing costs for European governments and businesses have risen as investors have braced for the end of the cheap money era. The Fed's earlier statements "effectively brought monetary tightening forward in time," the Bank for International Settlements in Basel, Switzerland, a clearinghouse for central banks worldwide, said in its quarterly report this past week.

The challenge for Europe is that its economy, still struggling, is not ready for higher interest rates. On the contrary, bank lending continues to decline in the euro zone, leaving businesses and consumers short of credit and threatening to strangle any modest signs of a return to growth.

In an attempt to soften the market reaction, the European Central Bank has promised to keep its benchmark interest rate at a record low indefinitely. …

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