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While you were sleeping: Fed comes to the rescue

Thursday 13th December 2012

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Wall Street advanced after Federal Reserve policy makers said they are extending and expanding their efforts to stimulate growth in the world's largest economy.

"The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions," according to a Fed statement following a two-day meeting of policy makers.

"Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook," the Fed said.

The Fed will continue purchasing agency mortgage-backed securities at a pace of US$40 billion per month and it will buy longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities, the so-called Operation Twist, is completed this month, initially at a pace of US$45 billion per month.

It also said it will keep the target range for the federal funds rate at zero to 0.25 percent as long as the unemployment rate remains above 6-1/2 percent and inflation "between one and two years ahead is projected to be no more than" 2.5 percent.

"This is going to be quantitative easing of US$85 billion a month of both purchases for mortgage bonds and Treasury securities," Douglas Cote, chief market strategist at New York-based ING US Investment Management, told Bloomberg News. "That's very stimulative to asset prices. It puts a lot of cash into the system."

Fed Chairman Ben Bernanke will discuss the latest policy moves at a news conference later today.

In afternoon trading in New York, the Dow Jones Industrial Average rose 0.50 percent, the Standard & Poor's 500 Index advanced 0.44 percent, while the Nasdaq Composite Index gained 0.35 percent. All three benchmarks were higher after the Fed's statement.

Europe's Stoxx 600 Index ended the day with a gain of just under 0.1 percent from the previous close.

Tempering gains were comments by House Speaker John Boehner that there were still "some serious differences" in the budget talks targeting a deal to avoid US$600 billion in tax increases and spending cuts by year end.

An agreement would bolster growth, according to JPMorgan Chase Chief Executive Officer Jamie Dimon.

"You might have a booming economy in a couple of months," with economic growth accelerating to 4 percent rather than 2 percent, Dimon said today at a conference in New York hosted by the New York Times's DealBook, according to Bloomberg.

Shares of Berkshire Hathaway gained, last up 3 percent, after Warren Buffett's company raised the threshold for share buybacks.

Still, "I don't expect a significant repurchase program to be announced as [Buffett] is clear that he is in acquisition mode," Michael Yoshikami, founder and CEO of Destination Wealth Management and a long-time Berkshire investor, told Reuters.

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