Gold spikes as Fed turns on the taps

Tim Wallace
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THE FEDERAL Reserve launched a third round of quantitative easing (QE3) last night, with Ben Bernanke pledging to buy an extra $40bn (£24.8bn) of assets every month until the economy recovers and unemployment falls in earnest.

The Fed will also keep extending the average maturity of its asset holdings through the rest of this year, and pledged to keep interest rates at rock bottom until at least the middle of 2015.

But even these unprecedented promises may not be enough to improve the economy, Bernanke warned, telling politicians to play their part in getting unemployment down.

In a sign that the move will help President Obama’s re-election prospects, markets soared on the announcement, with US shares rising as the move made monetary policy even looser than anticipated.

The dollar fell to its lowest level against the euro since May, while gold prices jumped as investors looked to protect themselves against inflation from the ultra-loose policy.

In previous rounds of quantitative easing (QE), the Fed has always set a target amount of asset purchases – initially government bonds, and now agency mortgage-backed securities (MBS).

But now it will buy $40bn of MBS every month until it sees strong signs that the economy is improving, and could pump in even more if the economy weakens further. That comes on top of the $25bn to $30bn of MBS it has bought monthly since October 2011 in its reinvestment programme.

“We are not going to be premature in withdrawing this,” Bernanke said. “Even after the economy starts to recover and unemployment moves down more decisively, we are not going to rush to tighten policy. We will give time to make sure the recovery is well established.”

The policy hopes to drive down interest rates and particularly mortgage rates in the hope that households and firms will increase spending and get the economy moving.

That should, Bernanke explained, push up house prices and improve confidence, and help firms feel able to invest and hire more.

But simply by giving a strong message, he hopes to raise confidence too.

“By assuring the public we are prepared to take action if the economy falters, we can give people confidence and maybe they will spend more,” said Bernanke.

However, he did acknowledge the Fed is “not promising a cure for all these ills – QE is not a panacea.”

Instead, other policymakers also have to play a part, and Bernanke singled out the looming “fiscal cliff” – when taxes rise and spending falls at the end of this year under current budget plans – as a hazard ahead.

“This could cause unemployment to rise and throw the economy back into recession,” he said. “So one basic thing to be done to is to address the fiscal cliff, while simultaneously addressing long-term fiscal sustainability”.

The Dow Jones jumped 1.62 per cent and the euro rose briefly to above $1.30 while gold rose 1.84 per cent to $1,766.75 per troy ounce.