MercoPress. South Atlantic News Agency

Markets up after Fed confirms it will continue with 85bn monthly bonds’ purchase

Bernanke: steady as she goes; targets remain 6.5% unemployment and 2% inflation

US stocks extended gains in volatile trading on Wednesday after the Federal Reserve gave no hint that a reduction in the pace of its bond-buying program is imminent. In a statement following its two-day meeting, the Fed said the economy continues to recover but still needs support.

The Fed said it will continue to buy 85 billion dollars in mortgage and Treasury securities per month in its ongoing effort to bolster an economy still challenged by federal budget-tightening and weak growth overseas.

The US central bank also recognized that inflation persistently below its 2% objective could pose risks to economic performance, “but it anticipates that inflation will move back toward its objective over the medium term”.

Stocks were up before the release of the Fed's policy statement, bolstered by data that showed the U.S. economy grew more quickly than expected in the second quarter. U.S. economic growth, as measured by GDP accelerated in the second quarter by a 1.7% annual rate, the government said. Economists had expected a 1.0 percent gain.

The dollar had risen on the economic data, which drove expectations that the Fed would start to scale back its assets purchases this year, but the Fed announcement axed most of those gains though the U.S. currency remained higher against the yen.

On Thursday, attention will switch to the European Central Bank and Bank of England policy meetings and data on global manufacturing activity, followed by the US monthly employment report on Friday.

Signs the developed world's central banks will keep monetary policy loose for a long time to support a tentative economic recovery have put many equity and commodities markets on course for their best month of the year in July.

Follows the FOMC report:

Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labour market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labour market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who 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.