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Business as usual for Federal Reserve; economic stimulus to continue (VIDEO)

Economists expected Fed to scale back monthly purchases of Treasury and mortgage-backed securities, but the central bank says unemployment "remains elevated."

Ben BernankeEnlarge
U.S. Federal Reserve Chairman Ben Bernanke. (Getty Images)

Citing an unemployment rate that "remains elevated" and saying it needed more evidence of a recovering economy, the US Federal Reserve announced on Wednesday that it would continue a program of economic stimulus, countering what was widely expected to be an easing of the program.

Financial markets welcomed the decision, with the S&P 500 and Dow Jones Industrial Average shooting to record highs, while bond yields sank in anticipation of continued strong demand for debt. 

The Federal Reserve was expected to begin its long retreat from ultra-easy monetary policy by announcing a small reduction in its bond buying, while stressing that benchmark US interest rates will remain near zero for a long time.

Most economists expected the Fed would opt to scale back its monthly purchases of Treasury and mortgage-backed securities by a modest $10 billion, a Reuters poll found.

That would take them to $75 billion and signal the beginning of the end to an unprecedented episode of monetary expansion that has been felt worldwide.

It won't happen; not yet, anyway.

"The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed announcement said.

"Accordingly, 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."

Fed policy makers instead cut their growth forecast for this year and next, suggesting the economy is feeling the impact of government spending cuts and continues to struggle to break free from the Great Recession, Agence France-Presse said.

The Federal Open Market Committee said that although the economy appears to be holding up amid government "sequester" spending cuts, it "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," AFP reported.

After the announcement, chairman Ben Bernanke said he's not aiming for a fixed target to reverse the buying policy.

"What we will be looking at is the overall labor market situation, including the unemployment rate, but other factors as well. There is no magic number," Bernanke said, the Associated Press reported.

Stock markets welcomed the announcement, Bloomberg News reported.

The Dow Jones closed at a record high of 15,676.94, up 0.9 percent on the previous session's close, while the S&P 500 added 1.2 percent to close at 1,725.52, which was also an all-time high. 

The tech-heavy Nasdaq gained 1 percent to finish at 3,783.64, the index's highest close since September 2000.

Treasury prices rose as investors increased their exposure to fixed-income assets, pushing the yield on benchmark 10-year bonds down to 2.706 percent. Bond prices move in the opposite direction to yield.  

The dollar, which is seen as a safe haven during periods of economic uncertainty, also weakened as the Fed's announcement boosted confidence in a market accustomed to stimulus spending. 

Reuters contributed to this report.

http://www.globalpost.com/dispatch/news/business/130918/fed-reserve-ben-bernanke-announcement-monetary-policy-live-video