While you were sleeping: Fed comes through

Thursday 4th November 2010

Stocks on Wall Street slipped as the Federal Reserve said it would buy an additional US$600 billion of US Treasuries through June, in an effort to speed up the pace of recovery in the world’s largest economy.

The additional stimulus, known as quantative easing, will amount to about US$75 billion of new purchases a month, the central bank said.

Policy makers “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington.

"Although the committee anticipates a gradual return to higher levels of research utilisation in a context of price stability, progress toward its objectives has been disappointingly slow," the Fed said.

In mid afternoon trading following the Fed announcement, the Dow Jones industrial average shed 0.26%, the Standard & Poor's 500 Index declined 0.36% and the Nasdaq Composite Index fell 0.33%.

The Fed is trying to lower unemployment and stave off deflation. The US economy grew at a 2% annual pace in the third quarter of this year while the jobless rate is lingering at 9.6%.

The central bank had already cut overnight interest rates to near zero in December 2008 and bought about US$1.7 trillion in US government debt and mortgage-linked bonds.

Information received since the last policy meeting “confirms that the pace of recovery in output and employment continues to be slow,” the Fed said. “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters,” according to the Fed.

Bonds gave up gains after the Fed’s statement, pushing the yield on the 30-year Treasury 0.02 percentage point higher to 3.95%.

The Dollar Index, which measures its value against a basket of currencies, gained on the announcement, rising 0.15% to 76.80.

Oil held onto its earlier gains, trading near US$85 a barrel after the Fed’s announcement.

In Europe, the Stoxx 600 declined 0.4% to 266.51 at the 4.30pm London close prior to the Fed’s announcement.

Yesterday Republicans retook the House of Representatives with a gain of at least 60 seats, their biggest increase since 1938. The result was widely anticipated and as a result, there was little impact on markets this morning ahead of the Fed’s statement.

Today, President Barack Obama said he took responsibility for changing the administration’s approach to businesses to make “absolutely clear” that their success is crucial to the economy.

Obama, at a White House news conference, said he wants to strike “the right balance” in making sure companies are following the rules and promoting US business.

Businesswire.co.nz

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