Alroy Commentary - Fed Keeps Bond Buying at $85 Billion
Federal Reserve unexpectedly decided to keep its bond-buying program, after Fed officials spent months alerted the public that Fed might start to tighten QE3 at September policy meeting. It was because economic growth is not strong enough past three months. Mr. Bernanke signaled in May that the central bank might pull back on the bond-buying program later this year. However, after three months observation, Fed officials regard that the economic hadn’t come up to their expectations. Since the job market growth is still weak and inflation is well below Fed’s target. They have concern that rapid tightening would have the effect of slowing growth in labor market and economy.
In addition, Mr. Bernanke showed Fed’s worry about fiscal policy whether Congress doesn’t pass legislation authorizing funding, said in his press conference following the policy meeting. He also emphasized the Fed policy is to keep the economy on course. When asked the timing of tightening QE3, Mr. Bernanke emphasized that there is no fixed calendar schedule and the future quantitative easing would depend on incoming economic data. He also promised the central bank will not raise its target rate until jobless is below 6.5%.
Investors seemed to like the prospect of refraining from QE taper. U.S. equities rose and the S&P 500 index climbed 1.2% at record level of 1725.48. The yield on U.S 10-year Treasury dropped to 2.7%. Gold and Oil jumped by 4.2% and 2.5% respectively.
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