19 Sep 2013

Fed holds off on reducing stimulus

1:34 pm on 19 September 2013

Wall Street rose to record highs and the New Zealand dollar jumped sharply against the US currency after the Federal Reserve surprised markets by saying it would keep pumping cheap money into the American economy.

A meeting of the main policy making committee at the world's most powerful central bank decided to continue putting $US85 billion a month into the financial markets.

There is no real doubt that the Federal Reserve will at some stage phase out the policy known as quantitative easing, the BBC reports. However, many in the markets thought it would start that process now.

Instead, the US central bank decided to wait for more evidence that the economy, including the employment situation, is getting stronger.

Former Federal Reserve governor Randall Kroszner says the labour market went down last month, but it was because fewer people were looking for work.

Although the recovery from the financial crisis has been more rapid in America than in many European countries, it is still not regarded as particularly strong.

The Federal Reserve also cut its economic forecasts for this year and next year.

Shares, dollar up

The decision sent US shares to record levels, with all three US indexes closing at record highs.

The Kiwi dollar rose as high as 83.83 US cents after the Federal Reserve's announcement, before retreating.

But it was boosted again by the news the economy had grown in the June quarter.

Shortly after midday on Thursday it was buying just under 84 US cents.

BNZ currency strategist Mike Jones is predicting the New Zealand dollar will remain elevated for the rest of the year.

"This is quite a fundamental development for the currency that the US Fed has effectively signalled they are not going to be pulling back on the easing programme for some time and that's a delay in excess of what the market had expected," he says.