Treasuries surge and stocks pare losses
Washington: The Federal Reserve reversed plans to exit from aggressive monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated.
Central bankers meeting Tuesday adopted a $2.05 trillion (Dh7.52 trillion) floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. Treasuries surged and stocks pared losses as some investors judged the decision opened the door to a resumption of large-scale asset purchases.
"The Fed is cognisant the recovery has lost some momentum and it is still willing to intervene," said Paul Ballew, a former Fed economist and a senior vice-president at Nationwide Mutual Insurance Co in Columbus, Ohio.
"We always thought the exit strategy would be challenging. If you're at the Fed, it's proven to be more problematic than what you thought."
Prevent shrinking
Officials directed the New York Fed's trading desk to reinvest what economists estimate will be $15 billion to $20 billion a month in maturing agency and mortgage-backed securities back into US Treasuries. The purchases will help keep Treasury yields and mortgage costs low and prevent the level of monetary stimulus from shrinking further.
"They are now targeting a balance-sheet level, and the fact they are targeting the balance sheet is new," said Julia Coronado, a senior US economist at BNP Paribas in New York who worked on the Fed Board staff for seven years. Any further easing "will likely come in the form of a higher balance sheet and investment in Treasuries."
Stocks drop
The dollar rose 0.8 per cent against the euro yesterday, climbing to $1.3071 at 9:56am in London. Stocks fell, with the Stoxx Europe 600 Index dropping 0.9 per cent and the MSCI Asia Pacific Index losing 1.6 per cent. Standard & Poor 500's index futures decreased 0.9 per cent.
US central bankers came to their August meeting with a series of reports that pointed to slowing growth. US companies added 71,000 workers to private payrolls in July, less than forecast by economists, and June gains were revised down to 31,000. The unemployment rate stayed at 9.5 per cent.
The jobless rate has sapped confidence, reducing consumer spending to a 1.6 per cent annual rate in the second quarter, about half the average pace in the last expansion. US companies don't have much room to raise prices in the face of weak demand, keeping inflation low.
The Fed's decision Tuesday may not succeed in bringing down unemployment even as it supports "risk assets," said Anthony Crescenzi at Pacific Investment Management Co, manager of the world's biggest bond fund.
Those jobs "won't be recovered easily, certainly not by adding a couple hundred billion dollars into the banking system," Crescenzi said in an interview on Bloomberg Television.
At the same time, "low volatility tends to be good for the interest-rate climate. It does push investors out of the risk spectrum generally. That tends to be good for risk assets."
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