THE US Federal Reserve stunned the global financial markets last night as it opted to keep its quantitative easing program going at $85bn a month despite widespread expectations that it would take the first step towards "tapering" it down.
The central bank governor Ben Bernanke said it would "await more evidence" that recent economic progress "will be sustained" before reversing course.
Stock markets and Treasury bonds soared on the announcement, with the Standard & Poor's 500 Index hitting a new intraday record of 1,717.84. However, analysts said it was only a temporary stay of the beginning of the end, as the extraordinarily loose monetary regime put in place to protect the US economy during the financial crisis will still wind up soon.
Currently, in the third round of a policy known as quantitative easing, the bank is buying $85bn worth of mortgage-related and government bonds every month, and most observers had expected that figure to be reduced by $10bn-$15bn per month after Mr Bernanke outlined a rough timeframe for rolling back the program earlier this year.
But in a statement following the latest meeting of its policy-setting Open Market Committee yesterday, the Fed said it was too early to begin reducing the measures that have been supporting the world's largest economy as it attempts to recover from the crisis and the subsequent recession.
"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labour market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy," it said, referring to the fiscal tightening imposed by Washington.
"However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
Expectations of a cut had been stoked in June after Mr Bernanke said the scope of the bond-buying program could be reduced this year, and purchases wound down completely by the middle of next year as unemployment falls towards 7 per cent.
But although the jobless rate in the US has been steadily improving, easing to 7.3 per cent last month, the most recent drop came about for the wrong reasons, with the labour force participation rate declining to 63.2 per cent, its lowest level since 1978.
Moreover, disagreements between Republicans and Democrats in Washington has raised the prospect of a government shutdown in coming weeks. Not long afterwards, the thorny issue of the US debt ceiling is once again slated to rear its head.
The confirmation that monetary policy will remain loose drove the S&P 500 to 1721.09 in afternoon trading, above its record of 1709.67, while the Dow Jones Industrial Average gained 112.35 points to rise to 15642.08.
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