US Fed to continue bond buying, keep rates below 0.25%

19 Sep 2013

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The US Federal Reserve has decided to continue its accommodative monetary policy and maintain economic stimulus at the current level, to pump trillions of dollars into the system to fight the downturn.

The Federal Open Market Committee (FOMC), which met today, decided to continue monthly asset purchases of $85 billion, which will now include $40 billion of mortgage-backed securities and $45 billion of  longer-term Treasuries.

The Fed has been buying $85bn worth of debt every month, to keep interest rates low. However, many economists were expecting it to cut back - or taper - the bond purchases. Chairman Ben Bernanke himself had  hinted at a gradual withdrawal of the policy of monetary expansion.

The Fed committee decided to keep the target range of interest for the federal funds at 0 to 0.25 per cent, which will be appropriate as long as the unemployment rate remains above 6.5 per cent.
Inflation for the next two years is projected to hover around 2-2.5 per cent, against the Fed's 2 per cent longer-term goal.

The Fed said economic activity and labour market conditions in the US have improved since the Fed began its asset purchase programme a year ago, adding it would, however, continue reinvesting principal payments  from its holdings of debt and mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing treasury securities at auction.

The move comes against the backdrop of a somewhat gloomier outlook forecast for economic growth by the Fed officials. In a new set of quarterly forecasts, the Fed now sees growth in a 2 per cent to 2.3 per cent  range this year, down from 2.3 per cent to 2.6 per cent in its June estimates. The downgrade for next year was even sharper at 2.9-3.1 per cent against 3.0-3.5 per cent earlier forecast.

"The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the US central bank said in a statement announcing its decision.

The measures were supported by all members of the FOMC, including incoming chairperson Janet L Yellen. Voting against the action was Esther L George, who said she was concerned that the continued high level of  monetary accommodation increased the risks of financial bubble and an increase in long-term inflation expectations.

The bond purchases are not on a preset course, and the Fed's decisions about their pace will remain contingent on its economic outlook as well as its assessment of the likely efficacy and costs of such purchases,  the committee said.

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