Bernanke continues with stimulus efforts

The US Federal Reserve kept its foot on the monetary accelerator but made a slight change to the language on its third round of quantitative easing that puts greater weight on the costs and risks.

Asset purchases under QE3 will continue at a pace of $85 billion a month and the US central bank expects to keep interest rates low until the unemployment rate falls below 6.5 per cent from the current 7.7 per cent, the Federal Open Market Committee said last night at the end of a two-day meeting in Washington.

But a tweaked line in the statement says the Fed “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”.

Speaking at a press conference after the meeting, Fed chairman Ben Bernanke said: "As we make progress toward our objective, we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation.

“We think it makes more sense to have our policy variable, which is the rate of flow of purchases, respond in a more continuous or sensitive way to changes in the outlook.”

The change did not represent any change in policy but is a nod to concerns among some members of the rate-setting committee about the costs and benefits of further quantitative easing.

The Fed made slight upgrades to its assessment of current economic conditions even as it cut its growth forecasts for 2013 and 2014.

It said that “labour market conditions have shown signs of improvement in recent months” and that the “housing sector has strengthened further”.

The Federal Open Markets Committee (FOMC) said that it “continues to see downside risks to its economic forecasts” but dropped a previous reference to “strains in global financial markets” despite the situation in Cyprus.

However, it acknowledged recent across-the-board cuts to public spending by noting that “fiscal policy has become somewhat more restrictive”.

While the dollar’s initial reaction to the statement was to the downside, its losses remained limited. The dollar index, which measures the value of the greenback against a basket of currencies, was 0.2 per cent lower as the euro advanced 0.7 per cent to trade at $1.2965.

On Wall Street, the S&P 500 held to earlier gains and traded 0.6 per cent higher after the FOMC announcement and within sight of an all-time high.

US treasuries briefly added to losses, with the yield on the 30-year bond climbing as high as 3.22 per cent before settling back at 3.17 per cent. The yield on the 10-year Treasury note was 3 basis points higher at 1.94 per cent.

In economic projections published alongside the FOMC statement under a new release schedule, the Fed cut 2013 growth projections to 2.6 per cent from 2.7 per cent, and shaved a little off 2014 as well.

But it also brought down its unemployment forecasts given that joblessness has fallen faster than it previously expected. It now expects unemployment of 7.4 per cent at the end of 2013 down from a previous forecast of 7.6 per cent.

The FOMC made little change to its inflation forecasts, expecting price rises to remain below its long-run goal of 2 per cent in 2013, 2014 and 2015.

The Fed was due to debate the merits of its asset purchases at this meeting amid concern among some FOMC members about risks to financial stability or difficulties when the central bank eventually has to shed assets from its swollen balance sheet.

But in recent speeches and testimony Mr Bernanke and vice-chairwoman Janet Yellen have shown relatively little concern. The slight reworking of the language in the statement suggests that their view has prevailed.
– Copyright The Financial Times Limited 2013/Bloomberg