Markets cheer Bernanke decision on interest rate

WASHINGTON / LONDON– - Reuters

Traders signal offers at the Chicago Board Options Exchange Jan 25. Merkets have welcomed Fed’s decision of further stimilus. AFP photo

Federal Reserve Chairman Ben Bernanke has said the U.S. central bank was ready to offer the economy additional stimulus after it announced it would likely keep interest rates near zero until at least late 2014.

Economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the central bank said. After every previous policy meeting dating to August, the Fed had said rates were not likely to rise until mid-2013.

Markets cheered the Fed’s rate outlook and European shares, base metals, gold and the euro all rose as the comments helped counter concerns among investors about Greece’s debt crisis worsening and hurting the global economy.

Cyclical stocks, whose earnings are supported when economic growth is strong, were the star performers, with the STOXX Europe 600 Basic Resources index rising 1.3 percent.

Kazakh miner Kazakhmys was a standout gainer in the sector, rising 4 percent to feature in the FTSE 100 top movers list, also buoyed by results after it reported better-than-expected production of by-products gold and silver.

Istanbul Stock Exchange’s İMKB 100 index stood at nearly 56,660 points in the afternoon yesterday with a 3.2 percent gain.

Three-month copper on the London Metal Exchange was up 1 percent at $8,468 a ton early in the morning, extending gains from the previous session. Brent crude rose above $110 yesterday.
“We are definitely seeing risk on at the moment, markets have got excited as economic growth helps bring down debt” said Louise Cooper, markets analyst at BGC Partners.

Inflation target

The Fed also took the historic step of adopting an explicit inflation target, though Bernanke took pains to stress that officials would be flexible about reining in price growth when unemployment was too high.

The late 2014 timeframe for the first rate hike was considerably later than investors had expected and some 18 months later than the Fed had suggested last year, and the announcement prompted a rally in U.S. government bonds.

Speaking at a news conference on Jan. 25 after a two-day policy meeting, Bernanke was cautious about recent improvements in the U.S. economy, and he left the door open to further Fed bond purchases.

“I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point,” Bernanke said. “If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then ... the logic of our framework says we should be looking for ways to do more.”
In response to the deepest recession in generations, the Fed slashed the overnight federal funds rate to near zero in December 2008. It has also more than tripled the size of its balance sheet to around $2.9 trillion through two separate bond purchase programs.

The policy is credited with preventing an even more devastating downturn, but it has been insufficient to bring unemployment down to levels considered normal during good economic times. Many Fed watchers expected a further round of bond buying, likely focusing on mortgage debt.

Fed officials agreed that a goal of 2 percent inflation would be in keeping with their congressional mandate of price stability. By their favorite measure, core inflation is running at about 1.7 percent.
They declined to announce a target for unemployment, saying the job market was often influenced by forces beyond their control.

In another key shift touted as part of an effort toward greater transparency, the Fed for the first time published policymakers’ projections for the appropriate path of the benchmark overnight federal funds rate.

These showed a wide range of views, from the three of 17 policymakers who said they thought rates should rise this year to two who want to hold off on any increase until 2016.

Still, the biggest concentration of estimates - five of 17 - was around 2014.