No hints of QE3 from Fed boss but euro fears linger

Julian Harris
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INVESTORS looking for a boost from the Federal Reserve were left disappointed yesterday as chief Ben Bernanke refused to signal a move towards more stimulus – unless the US is knocked by events in Europe.

Bernanke instead turned the focus towards America’s elected politicians, appealing to Democrats and Republicans to avoid another showdown over the debt ceiling.

His comments came as rating agency Fitch repeated its threat to downgrade the US next year if it does not come up with a credible deficit reduction plan.

“The brinkmanship of last summer over the debt limit had very significant, adverse effects for financial markets and for our economy,” Bernanke told the Joint Economic Committee. “Again, it knocked down confidence quite noticeably. I urge Congress to come to an agreement on that well in advance so not to push us to the twelfth hour.”

The Fed chief said that fiscal consolidation should not be too sharp to destabilise the recovery, but must be balanced between both short and long term measures.

His concerns were echoed by Fitch. “The US is the only country of the four major AAA-rated countries which does not have a credible fiscal consolidation plan,” said Fitch’s Ed Parker. “The US is the only one of the four largest economies whose debt as a percentage of GDP is expected to increase over the next five or six years.”

Despite a national debt of around $15.7 trillion, analysts hope that the US is recovering relatively well from the financial crisis. And yesterday Bernanke hinted that more stimulus would only come “in the event that financial stresses escalate” due to the Eurozone crisis, while sounding fairly upbeat over current indicators.

“The housing market looks to be stabilising which if true would be good news and going forward it would helpful to the recovery,” he said.

“The pace of improvements in the labour market from last summer through March was actually surprisingly strong given the relatively tepid rate of growth of overall economic activity. It was a puzzle that we were trying to understand.”

Investors are waiting to see if the Fed extends its scheme dubbed Operation Twist, or even increases the size of its total asset buying programme.