US Fed signals stronger economy won't slow $600-bn stimulus

Federal Reserve policy makers indicated that signs of economic strength won’t deter them from pumping money into the financial system so long as unemployment remains elevated.

The Federal Open Market Committee (FOMC) said yesterday after its final meeting of 2010 that growth is “insufficient to bring down unemployment” and inflation has “continued to trend lower”. US central bankers affirmed a plan to buy $600 billion of bonds through June and renewed their pledge for an “extended period” of low interest rates.

Stocks climbed and Treasuries fell as continued Fed stimulus and better-than-forecast retail sales boosted the outlook for growth in the coming year. Policy makers led by Chairman Ben S Bernanke are defying Republican criticism that their policy will fuel inflation and asset price bubbles to focus on cutting an unemployment rate that has stayed above 9.4 per cent since May 2009.

“The clear message is there is no rethinking of the programme, no consideration of backing off,” said Jim O’Sullivan, global chief economist at MF Global Ltd in New York

Signs of economic strength, along with prospects for additional fiscal stimulus, have pushed Treasury yields higher, with the 10-year yield rising to 3.47 per cent yesterday from 2.57 per cent on November 3, the day the second round of easing was announced. The Dow Jones Industrial Average reached the highest level since the September 15, 2008 bankruptcy of Lehman Brothers Holdings.

The dollar has climbed 3.9 per cent against a basket of six currencies, while inflation expectations for the next five years, as measured by the break-even rate between nominal and inflation-indexed bonds, rose to 1.63 per cent yesterday.

The Fed statement should “guide market participants to focusing on the unemployment rate as the relevant measure for whether the economy is picking up fast enough,” said Dean Maki, chief US economist at Barclays Capital in New York.