US Fed makes waves with hints of QE2

Marion Dakers
THE US Federal Reserve suggested it could enter another round of quantitative easing (QE) yesterday, as its rate-setting panel met in Washington to decide whether to intervene in the shaky economy.

The Federal Open Market Committee (FOMC) departed from previous language in its monthly statement, saying it “is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate”.

After its meeting in August, the Fed had simply said it would “employ its policy tools as necessary”.

Pressure has been growing on Fed chairman Ben Bernanke to consider pouring billions of pounds into the US economy, described by some as QE2. Recent figures showed that 9.6 per cent of the workforce is unemployed, while growth in the second quarter slowed to a yearly rate of 1.6 per cent.

“Prior to today’s statement, Fed officials indicated that the economy would have to slow further from here to justify additional easing,” said Société Générale analyst Aneta Markowska in a note. “The new language implies a potential shift in the Fed’s reaction function whereby several quarters of slow growth may be enough to justify further action.”

The Fed last intervened in 2008, when it bought $1.7 trillion (£1.06 trillion)?in longer-term bonds.

The FOMC decided to hold interest rates at between zero and 0.25 per cent, as expected, with only inflation hawk Thomas Hoenig dissenting. Hoenig has disagreed with the nine-strong panel for the last six months, and explained in the committee’s statement he believes the continued low level “will lead to future imbalances that undermine stable long-run growth”.

US bonds surged following the meeting yesterday afternoon, with the yield on the two-year note hitting a record low, and the dollar fell sharply.