Fed at war over fresh stimulus

 
Julian Harris
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THE FEDERAL Reserve last night pledged to keep US interest rates at their “exceptionally low levels” until at least mid-2013, in a bid to stimulate the ailing US recovery.

Yet three dissenters broke ranks from chairman Ben Bernanke (pictured) and his senior colleagues on the Federal Open Market Committee.

Richard Fisher, Narayana Kocherlakota, and Charles Plosser rebelled against the statement, breaking from the Fed’s convention of listing no more than one dissenting name.

The news came on the day that stocks pared some of the painful losses over the past week.

The Dow Jones industrial average and S&P 500 rose 3.98 per cent and 4.74 per cent respectively, despite tanking by over one per cent as the Fed released its statement.

The statement included a devastatingly downbeat verdict on the American recovery, describing economic conditions as “slower”, “flattened”, “depressed” and “weak” – yet did not signal the start of another round of quantitative easing.

The Dow is still over 12 per cent down from its peak this year as investors worry themselves about faltering growth as well as the recent downgrade of the US economy by ratings agency S&P.

The dollar plunged as low as 0.706 against the Swiss franc, falling more than five per cent during the day.

The Fed’s gloomy statement turns attention to the Bank of England’s latest Inflation Report, which will be released this morning and could be used by Bank governor Mervyn King to support his own stance on keeping interest rates at historically low levels.

King has led the Bank’s dovish charge despite concerns about rising inflation. The consumer price index has consistently surpassed the two per cent target.

World markets have plummeted in recent days on concerns of faltering growth in a batch of economies as well as on debt concerns within the Eurozone.

The Bank forecast growth for this year of around 1.75 per cent in May’s report -- yet economists now see the UK expanding by just 1.3 per cent, according to figures compiled by the Treasury.

The FTSE plummeted below the 5,000 mark yesterday as the sell-off continued early on, yet later recovered confidently to 5,164 points.

Back in the US, the Fed’s dovish decision on rates was far from unanimous, with three dissenters refusing to support the statement. The three voted to maintain the stance that accommodative rates should only be pledged “for an extended period”.

Their opposition suggests resistance on the committee to a third period of quantitative easing, dubbed “QE3”.

The statement hinted at the possibility of QE3 to come, alluding to “the range of policy tools available to promote a stronger economic recovery in a context of price stability”. The committee “is prepared to employ these tools as appropriate,” it said.

The text “sounds very similar” to Fed statements in the build up to QE2, noted Paul Dales of Capital Economics.

However, “the rebound in core inflation means that the hurdles for QE3 are higher than for QE2, particularly when the Fed is unusually divided,” Dales added.

Gold futures soared to a record $1,743 an ounce following the statement, adding nearly $30 to their pre-statement levels.

Yields on 10-year US government bonds sank as low as 2.03 per cent after the Fed spoke, yet rose quickly again to 2.25 per cent.