While you were sleeping: Fed delivers

Friday 14th September 2012

US Federal Reserve policy makers made good on a promise to help revive the world's largest economy with a plan for open-ended asset purchases and by pledging to keep its key interest rate at a record low until at least mid-2015.

At the end of their scheduled two-day meeting, Fed Chairman Ben Bernanke and his colleagues said they agreed the central bank will buy more assets, at a pace of an additional US$40 billion of mortgage-backed securities per month, until the jobs market returns to health.

"The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities," the Fed said in a statement.

The Fed also lifted its projections for economic growth in 2013 and 2014. It now forecasts 2013 gross domestic product growth of 2.5 percent to 3 percent, compared with 2.2 percent to 2.8 percent in June.

"It was a very powerful statement," Kevin Caron, a market strategist at Stifel Nicolaus & Co in Florham Park, New Jersey, told Bloomberg News. "The Fed is going all in here, especially with their commitment to continue asset purchases until they see the desired result in the form of a lower unemployment rate. This statement removes a lot of uncertainty about the Fed's commitment to maintaining price stability."

Ron Rowland, president of Capital Cities Asset Management in Austin, Texas, agrees.

"There was a certain level of expectation built in, but I think there were really a lot of doubters out there. From that standpoint, a lot of those doubters had to be brought up to speed here, so to speak," Rowland told Reuters. "The other thing is that people realise that the Fed is trying to be serious about this. This isn't just a game to them."

In late afternoon trading in New York, the Dow Jones Industrial Average rose 1.42 percent, the Standard & Poor's 500 climbed 1.67 percent, while the Nasdaq Composite Index increased 1.43 percent.

For some the new measures raise the spectre of inflation, lowering the appeal of bonds.

"If they are going to hold rates low until even after the economy picks up, then inflation will be lingering in the back of people's minds," Leslie Barbi, head of fixed-income investments in New York managing US$25 billion in institutional assets at Guardian Life Insurance of America, told Bloomberg.

Meanwhile, Apple shares got another lift, last up 2.1 percent to US$683.81, on analyst forecasts that sales of its new iPhone 5 will far surpass those of its previous model. Some predict sales of this model will double those of the previous model's in the first week.

"This is going to be the best-selling consumer electronics device of all time, bar none," Carl Howe, an analyst at Boston-based Yankee Group, told Bloomberg.

Analysts raised forecasts for Apple's share price by as much as US$200 to between US$750 and US$1,000.

In Europe, the Stoxx 600 Index finished the session with a 0.2 percent fall from the previous close.

BusinessDesk.co.nz

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