By Isaac Cohen*
To the positive surprise of many, last week, the Federal Reserve announced the continuation of the support for the still modest US economic recovery. It decided to keep interest rates low and continue purchasing government bonds and mortgage backed securities.
Since May, central bankers said gradual reduction of bond purchases could start by the end of this year. For this reason, the decision to maintain the accommodative policy was surprising and generated a sigh of relief in world markets. Stocks climbed, bond prices gained, the dollar plunged and currencies from emerging markets ceased falling.
The statement issued after the meeting said the central bank decided “to await more evidence that progress will be sustained,” before changing course. Federal Reserve Chairman Ben Bernanke, during the press conference held at the conclusion of the meeting, recognized they had been “overoptimistic” about economic performance. Recent tightening of financial conditions, in the form of higher long term interest rates, together with fiscal restraint emanating from Congress and low inflation, were highlighted as the downside risks to the economic outlook.
Chairman Bernanke said “market expectations” did not dictate policy decisions. He specified that a policy change requires evidence on less restraining fiscal policy, inflation closer to the 2 percent target and more job creation, instead of less unemployment caused by less persons looking for jobs.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC Washington Office.