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[size=1.125]US Fed pumps in another $600bn to prop up ailing economy
A trader watching the Federal Reserve announcement at the New York Stock Exchange earlier today. Photograph: Andrew Gombert/EPA
Larry Elliott and Phillip Inman
[size=0.75]Wednesday 3 November 2010 19.58 GMT
America's central bank announced that it would pump an additional $600bn (￡372bn) into the ailing US economy over the next eight months in an attempt to accelerate growth and cut unemployment.
Expressing concern at the sluggish recovery from the worst downturn since the Great Depression, the Federal Reserve said it would buy $75bn of long-term Treasury bills each month until the middle of next year. The expansion of the Fed's quantitative easing programme was accompanied by a pledge to keep interest rates at ultra-low levels for an "extended period", which Wall Street took as a commitment to leave borrowing costs unchanged for at least the next two years.
Market reaction to the widely anticipated announcement was initially lukewarm, with some disappointment in New York that the package of support for the economy had not been bigger. Hopes of a fresh $1tn boost to activity were dashed, although the Fed did announce that the $600bn injected would be topped up by around $250bn of re-invested assets, mainly mortgages, from the first tranche of QE. In addition, the US policymakers left the door open for an even bigger injection of electronic money into the economy should growth continue to remain weak.
While the US clawed its way out of recession in 2009, recovery has been slower than in previous economic cycles. The Fed said it would "regularly review the pace of its securities purchases and the overall size of its asset-purchase programme in light of incoming information and will adjust the programme as needed to best foster maximum employment and price stability".
The decision to sanction move was taken by 10-1, with only Thomas Hoenig dissenting.
In the first 20 minutes after the Fed's decision, the Dow Jones industrial average fell 50 points, while an initial drop of one cent in the value of the dollar against the euro was reversed. Oil rose to a six-month high of $85 a barrel for US light crude on predictions that the extra liquidity being pumped into global markets by the Fed would discourage investors from buying low-yielding government stock in favour of speculating on commodity prices.
Analysts said that the price of gold was likely to rise in response to the move and would see fresh highs before the end of the year. The Fed explained that it had been motivated by the high level of unemployment – currently 9.6% – and the continued weakness in the housing market, where prices have resumed their fall following the expiry in the spring of a government tax break for new home ownership. "Employers remain reluctant to add to payrolls. Housing starts continue to be depressed," the central bank said.
It added that the purchase of securities was designed both to help activity and ensure that inflation did not fall too far. The Fed has a dual mandate of price stability and full employment, but admitted last night that progress towards both goals was "disappointingly slow".
The Bank of Japan is expected to follow the Fed's lead with its own package of QE by the end of the week, although the Bank of England is expected to leave policy unchanged when it announces the decision of the two-day meeting of its monetary policy committee tomorrow.
Jeff Kleintop, chief market strategist at LPL Financial in Boston, said: "This provides the market with additional clarity. It now knows the size of the purchases, how long they're going to take and the pace at which the Fed is going to conduct it.
"The question is whether this is enough. The consensus was $500bn over the next six months or so. This is just a little bit ahead. They just wanted to go a little bit above the consensus that was already priced in, the $500bn. And they're attempting to just exceed expectations here by giving that additional clarity and bumping that number up to $600 bn."
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