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US Fed holds QE as government shutdown weighs on growth

Anna Fedorova
Written By:
Anna Fedorova

The US Federal Reserve has yet again kept its bond buying programme unchanged, in a move that signals a less optimistic outlook for US economic growth.

In its latest minutes released on Wednesday, the US central bank announced plans to continue buying $85bn in bonds per month.

It alluded to the damage caused to the economic outlook by the government shutdown for more than half of October, as well as a slowing recovery in the housing market.

The minutes also mention concerns over increasing borrowing costs, suggesting the bank will maintain interest rates at the current depressed levels.

Last month, the Fed shocked markets by keeping its bond buying programme unchanged, after previously saying it will be scaled back sooner rather than later.

However, policy tightening is now off the cards until the damage caused by the government shutdown can be quantified.

Reports on Wednesday also showed the number of hires by US private sector employers in October dropped to the lowest in six months; the central bank said rates will remain on hold until the unemployment rate falls below 6.5%.

Although a reduction in QE was widely expected last month, economists were not surprised by this month’s announcement.

Jeremy Cook, chief economist at foreign exchange company World First, said: “There was never any real chance that we would have seen any form of asset purchase reduction at this meeting; they were probably more likely to take on the euro than cut stimulus tonight.

“How much damage was wrought by the shutdown and the fiscal fight is yet unknown. The Fed is simply saying to the market that until we know more, a decision cannot be made.”

Cook maintains his forecast for a reduction of monetary stimulus in March 2014.

Meanwhile, the announcement was a blow to Asian markets. The Shanghai Composite index fell 0.87%, Korea’s Kospi retreated 1.43% and the Hang Seng is down 0.27%.

Japan’s Nikkei also fell 1.2%, despite a positive statement form the Bank of Japan, which increased economic growth forecasts for next year and expressed confidence it will reach its 2% inflation target.