Thursday 26 January 2012

Fed to keep monetary policy accommodative

The Federal Reserve looks set to keep monetary policy highly accommodative for a few more years. Bloomberg reports on the outcome of the Fed's monetary policy meeting on Wednesday:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference today after a Federal Open Market Committee meeting in Washington. Bond buying is “an option that’s certainly on the table.”

The extension of the duration of low rates comes as the Fed lowered its forecast for growth this year to 2.2 percent to 2.7 percent from 2.5 percent to 2.9 percent in November. The projection for next year's growth has been lowered to 2.8 percent to 3.2 percent from 3.0 percent to 3.5 percent.

The Fed also revealed on Wednesday that it has set a 2 percent target for inflation.

While recent economic data have mostly indicated that the US economy continues to grow, Wednesday did bring a negative report in the form of a 3.5 percent decline in pending home sales in December, which nevertheless left it near a 19-month high.

Meanwhile, the data from Europe has gotten better in recent days. Wednesday continued that trend with a report that the Ifo index of German business confidence rose to 108.3 in January, a five-month high, from 107.3 in December.

Somewhat less positive was the news on Wednesday that the UK economy shrank by 0.2 percent in the fourth quarter. Further declines in the UK economy looks likely to be limited though after the Confederation of British Industry reported that its total order book balance rose to -16 in January from -23 in December.

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