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Shares soar as Fed sticks with stimulus
US stock markets hit record highs Wednesday as the Federal Reserve surprised investors by announcing that the economic recovery was too fragile to cut back on its massive $85bn-a-month stimulus program.
After a two-day meeting, the federal open market committee (FOMC) said it required "more evidence that progress will be sustained". The news delighted the markets which had sunk ahead of the news on fears that the Fed was preparing to "taper" the so-called quantitative easing (QE) program. Even the threat of a slight reduction in the stimulus spooked the markets in July.
But the news also underlined the precarious state of the wider economy as a row over the US's debt limit threatens a government shutdown. In a press conference Ben Bernanke, Fed chairman, warned that the current row could have "very serious consequences".
Analysts had expected the Fed to announce that it was preparing to trim back QE, a huge bond-buying scheme aimed at keeping interest rates down and encouraging business investment.
Bernanke signalled in July that the scheme would be cut back and that such a move could be announced in September. But the FOMC concluded to leave the scheme intact for now.
The committee said it saw "improvement in economic activity and labor market conditions". But it added: "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
It would continue to closely monitor economic and financial developments in coming months and continue its purchases of Treasury and mortgage-backed securities "until the outlook for the labor market has improved substantially in a context of price stability".
Bernanke warned that the political clash over the US's debt limit and the threat of a government shutdown were all likely to harm the economy. "A government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy," he said.
The FOMC said fiscal policy was "restraining economic growth" and expressed concern about rising mortgage rates and the still high unemployment rate. Bernanke said the FOMC's ability to mitigate the impact of a debt ceiling crisis was "very limited".
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