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BULLISH FED FUELS HOPE ON ECONOMY

THE US Federal Reserve signalled yesterday that the economic recovery was gathering strength as it kept interest rates near zero.

The Federal Open Market Committee adopted a generally more positive tone in its policy statement than in December, noting that economic activity “has continued to strengthen” and that the deterioration in the labour market is abating.

The Dow Jones initially fell 55 points but ended the day 41.87 points, or 0.4 per cent higher, at 10,236.16 as there were no signs of immediate monetary tightening, and ahead of President Barack Obama’s State of the Union address.

“You have no news here, it’s more or less a non-event and gives the market a chance to think we can keep the recovery going,” said Andrew Fitzpatrick of Hinsdale Associates.

The world’s largest economy is slowly on the mend, although the Fed did not repeat its December reference to signs of improvement in the housing market. While business spending on equipment and software has picked up, employers remain reluctant to hire. It also added that bank lending is still contracting, but financial market conditions should underpin economic growth.

The Fed judged that inflation is likely to be subdued for some time, allowing it to keep the federal funds rate at “exceptionally low levels... for an extended period”. The committee voted 9-1 to hold rates steady, with Kansas City Federal Reserve Bank president Thomas Hoenig dissenting because he thought economic conditions had improved enough to eliminate that pledge.

The economy returned to growth in the third quarter and most economists think it picked up further in the final three months of the year.

“The US Fed has demonstrated again that it is in no hurry to rein in the enormous amount of policy accommodation currently in place,” said Paul Ashworth at Capital Economics.

The US central bank reiterated that its programme of buying $1.43 trillion (£884bn) in housing-linked debt would end by 31 March. Other emergency lending facilities opened up during the financial crisis will be wound down, such as the Term Auction Facility, which will end in March. “The withdrawal of these various facilities hardly constitutes a tightening of policy when demand for those emergency loans had all but dried up anyway,” said Ashworth, noting that the Fed only got offers for about half the $75bn offered in term auction credit this month.

Other major central banks announced yesterday they would stop the emergency US dollar
lending introduced during the financial crisis.