In a move that surprised the financial markets, the Federal Reserve has said it is not yet ready to wind down its massive monetary stimulus.
The US central bank explained before it can do that it needs more evidence of a solid recovery by the world’s largest economy.
Fed chairman Ben Bernanke revealed economic growth next year is likely to be weaker than earlier predicted: “We have been over-optimistic about out-year growth. The potential rate of growth of the economy has been slowed.
Bernanke stressed the 85 billion dollars a month purchase of bonds to pump money into the economy has no set end point.
He also pointed out interest rates will stay at super low levels for now .. as the Fed economists cut their growth forecast for this year to a range of between 2.0 and 2.3 percent.
Lawrence White, of New York University’s Stern School of Business explained: “The Fed is still not fully confident that the expansion of the US economy is on a self-sustaining basis. [It thinks] that the economy still needs this kind of stimulus.”
On the all important employment situation, Bernanke said: “Conditions in the job market today are still far from what all of us would like to see. Nevertheless, meaningful progress has been made in the year since we announced the asset purchase programme.”
He also backed away from the link between ending stimulus all together and the unemployment rate falling to 7.0 percent.
He said that was not a “magic number” governing when the Fed stops its money printing. In August the rate was 7.3 percent.
Housing – which got us into this mess – was also a concern for the Fed.
Home building in the US edged higher in September, but a recent rise in long-term interest rates for mortgages is keeping people from buying. Rates have gone up based on the stimulus being reduced soon.
The surprise announcement from the Fed means it might not begin to wind down its bond buying until after Bernanke’s term as Fed chairman expires next January.