Shares at record high as Federal Reserve refrains from tapering

Federal Reserve Chairman Ben Bernanke said: "Asset purchases are not on a preset course"

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The US Federal Reserve has decided to maintain its economic stimulus programme at the current level, despite speculation that it would start scaling it back.

US shares jumped after the announcement with all three US indexes closing at record highs.

It had been widely expected that the central bank would cut back - or taper - its $85bn a month bond purchase plan.

The Federal Reserve has been buying bonds to help boost the economy.

In a statement, the Fed said the unemployment rate "remains elevated".

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"The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," it said.

Uncertainty over the strength of the economic recovery was underlined by the Fed's latest economic growth forecasts.

It cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a June estimate of between 2.3% and 2.6%.

'No fixed schedule'

In a press conference following the release of the statement, chairman Ben Bernanke highlighted three reasons why policy makers had decided to hold off scaling back its bond purchasing.

Those were: the low labour force participation rate, drags on economic growth due to congressional wrangling over a looming budget deadline, and the recent rise in mortgage rates.

He said "asset purchases are not on a preset course" and that the central bank would continue to prop up the US economy for as long as it felt extra stimulus was needed.

"There is no fixed calendar, schedule. I really have to emphasise that," said Mr Bernanke.

Analysis

After months of talking about tapering, the decision by the US Federal Reserve to continue its policy of quantitative easing took many at the New York Stock Exchange by complete surprise. Some used the word shocked. Others were just speechless.

Earlier in the day, the conversation was not if the Fed would ease its asset purchases, but by how much. One trader I spoke with immediately after the statement was released kept glancing away to look up at the big board as the market climbed to record highs.

By keeping the asset purchases as is, the Federal Reserve is saying the US economy is not strong enough to stand on its on. For financial markets, that's welcome news as it means the money will keep flowing.

It's not so welcome for the traders who spent months preparing for the eventual days of easy money to wind down. Now, the question is whether these market highs are sustainable?

And of course, if the Fed didn't taper this time, then when?

Mr Bernanke expressed frustration at the looming congressional impasse on whether or not to raise the limit that the US can borrow.

"I think that a government shutdown, and perhaps even more so, a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy," he warned.

He also defended his decision to begin hinting to markets that the central bank was considering a slowdown in its stimulus efforts in June, leading to a build up in speculation over the summer.

"I think there's no alternative in making monetary policy but to communicate as clearly as possible," he said.

He refused to take questions on what he planned to do once his second term ends in January 2014.

"If you will indulge me just a little longer, I prefer not to talk about my plans at this point," he said.

'Absolutely unanticipated'

The news of the delay in cutting back on the economic stimulus took many by surprise.

"This caught any professional I've spoken to in the last month - this caught us all on the wrong side of the trade," Benedict P. Willis III, managing director at Albert Fried & Company, told the BBC from the floor of the New York Stock Exchange.

"This was absolutely unanticipated from the market's perspective."

Mr Willis said he was surprised by the market reaction because the Fed's decision to delay essentially means that the central bank thinks the US economy is weaker than it had previously thought.

The dollar fell, and gold prices rose on the news.

Mortgage rates, which had risen dramatically over the summer, fell, which will go some way towards easing concerns that higher rates were hurting a nascent housing recovery.

"The Fed is in no rush to taper or slow the economy," said Ward McCarthy, chief US economist at Jefferies.

"The bottom line is that the economy continues to move toward a condition that will eventually allow the Fed to gradually reduce the size of [bond] purchases.

However, the economy has not yet reached that point."

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