Sept. 18: The US Federal Reserve has postponed any retreat from its long-running stimulus campaign, dispelling the worst fears in India and other emerging markets.
The Fed, headed by Ben S. Bernanke, said today it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth.
The Fed said it was concerned that fiscal policy once again “is restraining economic growth”, threatening to undermine what it had described just months ago as a recovery gaining strength.
The note of caution for the US is expected to sound sweet for now for the Indian markets which were fearing an exodus of dollars to America had the Fed cut its bond-buying programme by more than $10 billion.
The $85-billion-a-month bond-buying programme essentially means that the Fed was pumping money into the system and a part of the cash was finding its way to markets like India because of poor returns from the US.
A big reduction of the bond-buying programme would have meant less money for Indian markets and signalled a turnaround in America strong enough to offer investors better returns. Oil prices would also have risen, adding to India’s woes.
The panic was so deep in India earlier this month that the markets had already factored in a cut of $10-15 billion. The big question was whether outgoing Fed chairman Bernanke would go for a cut steeper than that.
By the time the Fed had made the announcement in the US, it was midnight in India and the stock markets had closed higher on the hope that Bernanke would wield the axe gently.
But Bernanke sprang a pleasant surprise on the emerging markets by not picking up the axe at all.
US stock markets jumped after the 2pm (local time) announcement. Standard & Poor’s 500-stock index touched a record high and the Dow Jones industrial average rose more than 100 points.
The dollar, which has been tormenting the rupee, fell to a seven-month low against the euro.
Although fundamental problems in the Indian economy were also to blame for the recent crash of the rupee, Indian markets were breathing a little easy after US job figures announced last week suggested that the world’s largest economy was not yet out of the woods.
However, Bernanke was under pressure in the US to roll back the stimulus package. The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements.
But in their economic forecasts, also published on Wednesday, Fed officials again retreated from overly optimistic predictions about the pace of growth in the US over the next several years.
The aggregation of forecasts showed that Fed officials expect growth to remain sluggish for years to come, suggesting that the dismantling of the stimulus campaign will remain slow and cautious.
A White House official said on Wednesday that Federal Reserve vice-chairperson Janet Yellen is the front-runner to take over the top job at the US central bank when Bernanke steps down, the strongest indication yet of her likely nomination.