The Fed will keep interest rates low and maintain its policy of quantitative easing (QE2), it announced last night.
“The economic recovery is continuing,” it said, although it warned that the recovery was still too slow to significantly dent the country’s high unemployment.
Markets had been wary of a move towards monetary tightening, either from a slight rise in rates, or a cutback in QE2.
“You had a relief rally at first on the simple fact that there were no dissents,” said Cary Leahey of Decision Economics. “The market was worried that up to two, or perhaps even three, incoming hawks might dissent and no one did.”
Earlier in the day markets reacted well to President Obama’s state of the union address, which stressed a freeze on government spending, and the need to lower corporate tax rates and simplify the tax code.
However, the country’s public finances remain in a concerning state, after the congressional budget office reported the budget deficit will jump nearly 40 per cent over forecasts. The CBO said the fiscal 2011 deficit will hit $1.48 trillion, up from last August’s $1.07 trillion estimate, which was crafted before Bush-era tax rates were extended at a cost of $858bn over 10 years.
“The US faces daunting economic and budgetary challenges,” the CBO said. The CBO said the $1.48 trillion deficit would be about 9.8 per cent of GDP.