The US Federal Reserve has allayed fears that financial support for the economy is about to be withdrawn by confirming more rounds of bond buying.
After a planned two-day meeting, the Fed announced the $85 billion a month stimulus for the US will continue indefinitely as the money men believe the economy still needs shoring up.
Wall Street stock values jumped on the back of the announcement.
The Fed explained that although the economy is showing moderate recovery and employment is rising, growth is being held back by government spending cuts and the rising cost of finance.
By buying bonds, the Fed keeps interest rates low in a bid to spur businesses to spend and homebuyers to take out a mortgage.
Zero interest rates
The long-term aim is for the Fed to keep interest rates as near to zero as possible until unemployment drops below 6.5%. The jobless rate is stubbornly running at 7.3%, but the Fed’s forecast is to hit the target rate around the end of 2014.
Although the headline economic figures in the US look good, the underlying markets are stagnant.
For example, many experts credit the drop in unemployment to people giving up looking for work rather than businesses creating jobs.
The rate is the lowest since 2008, but the shine is taken off then figures when hundreds of thousands of candidates who have surrendered in their quest for work are considered as no longer unemployed.
In the end, unemployment rates depend on the way government count the numbers rather than who is in or out of work.
Economic uncertainty
Adding to the economic uncertainty is who will succeed current Fed chairman Ben Bernanke, who leaves the post in the new year.
The favourite, Lawrence Summers, has announced he is withdrawing his name for consideration, leaving a void waiting to be filled by Janet Yellen, the deputy chairman. She would be the first woman to chair the Fed if President Obama confirms her in the top chair.
The concern is how the new chairman will continue Bernanke’s policies and will a big change upset the economic apple cart.
Keith Wade, Chief Economist at Schroders, said: “The Fed obviously believes more needs to be done to underwrite gains in the jobs market. A worry across the States is tougher credit conditions as bond and mortgage rates rise.
“Bernanke is trying to help interest rates and the dollar, but bubble worries may return. The Fed may have missed the perfect opportunity to start moving policy forward.”
