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In surprise vote, Fed continues stimulus plan
September 19, 2013, 3:26 am

Bernanke's statements following the Fed's surprise vote are sure to ease concerns in India [Xinhua]

Bernanke’s statements following the Fed’s surprise vote are sure to ease concerns in India [Xinhua]

In a surprise move, members of the Open Market Committee at the US Federal Reserve voted Wednesday to continue a stimulus programme – known as quantitative easing – of buying $85 billion in bonds.

Global markets, especially those in emerging economies, were critical of comments by the Fed’s Chairman Ben Bernanke in the past six months that Washington would end quantitative easing in mid-2014.

The buying of bonds on such a scale leads to an increase in their values and creates “extra cash” for companies and investment firms.

Many have used the extra cash to invest in foreign markets – particularly in India, Brazil, China, Turkey, Indonesia and others considered a “good buy”.

When the US announced in May that it was ending quantitative easing, foreign investors began to pull their capital out of once lucrative markets in Brazil, South Africa, India and Turkey.

This led to a massive drop in local currencies in these countries.

At the G20 Saint Petersburg Leaders’ Summit two weeks ago, China and India urged developed nations to carry out effective structural reforms, and seriously consider the timing, steps and patterns of withdrawing their quantitative easing measures.

On Wednesday, Bernanke said that the Fed had not set a fixed schedule for when quantitative easing would end. In statements made several months ago, Bernanke had set an unemployment rate of 7 per cent as a sign of a revived economy that would no longer require the stimulus regimen. Now, however, with unemployment in the US at 7.3 per cent, the Fed chairman says the 7 per cent threshold will no longer be an absolute line.

The Open Market Committee said following its two-day policy conference that while the economy had made some gains, they decided to await more evidence that progress will be sustained before adjusting the pace of quantitative easing.

US economic growth was earlier revised to 2.3 per cent from 2.6 per cent this year.

The Fed also said it was keeping short-term interest rates near zero, in a bid to encourage lending.

“Mortgage rates have risen further and fiscal policy is restraining economic growth,” the Fed said, warning that “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”

Following the meeting, Bernanke said that economic growth has generally been proceeding at a moderate pace with continued, albeit somewhat uneven, improvement in labor market conditions. But he warned that “to say that the job market has improved does not imply that current conditions are satisfactory.”

The news is sure to ease concerns in India, which has blamed the Fed’s initial plan (to end the stimulus package) for the dramatic drop in the rupee’s value. The rupee fell by over 18 per cent this past summer.

In late August, Indian Prime Minister Manhoman Singh said that the Fed’s tapering – or ending of quantitative easing – hurt the local economy. The Ministry of Finance and the Ministry of Commerce and Industry scrambled to contain the damage, with the latter setting up a task force to examine whether currency swapping with China could help the rupee’s free fall.

India also urged cooperation and support from its fellow BRICS members to come up with a common strategy to minimise the impact of tapering.

Brazilian President Dilma Rousseff also criticised the Fed in late August and said that her country’s Central Bank held several currency swap auctions in a bid to halt the real’s depreciation against the greenback.

In the meantime, markets have reacted positively to the Fed’s vote.

On Thursday, Japan’s Nikkei rose to its highest level in nearly two months on the news.

Earlier, oil prices jumped by 2.5 per cent while the price of gold jumped by at least $30. In New York, the S&P 500 surged to a new record high; the Dow Jones jumped over 147 points to a new record.

The BRICS Post with inputs from Agencies

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