Fed bond buying word hits markets

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Fed bond buying word hits markets

Fed bond buying word hits markets
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Federal Reserve Chairman Ben Bernanke sent financial markets reeling when he said the US economy is expanding strongly
enough for the central bank to begin slowing the pace of its bond-buying programme later this year.

At the end of their two-day meeting on Wednesday, Bernanke and the other central bank policymakers said they will continue to pump 85 billion dollars into the economy each month.

But at the post announcement news conference Bernanke said it could begin tapering that programme “later this year” and it could end by the middle of 2014 if growth remains strong.

He emphasised that everything depends on whether the US economy continues to gain pace, as the Fed sees it, and the central bank was “prepared to increase or reduce the pace of those bond purchases” as the outlook for unemployment and inflation changes

The Fed also said that the main interest rate will stay close to zero as long as unemployment remains above 6.5 percent and the outlook for inflation does not exceed 2.5 percent.

On growth, the Fed’s economists slightly revised down their GDP forecast for this year but increased their 2014 forecast to growth of 3.25 percent, which was much better than market expectations.

Reaction was swift. European shares slumped on Thursday with mining and luxury goods companies among the biggest losers.

The FTSEurofirst index of the region’s top 300 shares fell 2.9 percent.

The sell off of miners followed fresh signs of a slowdown in China – which is the world’s biggest metals consumer.

Government bonds and commodities prices were also hit.

Emerging markets, many of which have been primed by the cheap Fed cash, saw some of the biggest selling as investors
rushed to the exits.

MSCI’s benchmark index for emerging equities slumped by more than 3.3 percent and shares across the Asian Pacific region outside Japan recorded their biggest daily drop since late 2011.

World stocks in general saw the largest one-day drop for 12 months.