The Federal Reserve said on Wednesday that it would postpone any retreat from its monetary stimulus campaign possibly until next year, as Congressional Republicans and the White House are hurtling toward an impasse over government spending.
Fed’s Chairman Ben S. Bernanke said the US economy which is now recovering could turn for the worse.
“We have been overoptimistic,” Bernanke said at a news conference. The Fed is “avoiding a tightening until we can be comfortable that the economy is in fact growing the way that we want it to be growing,” he added, as reported by The New York Times.
On Wednesday, House leaders said they would seek to pass a federal budget stripping all financing for President Barack Obama’s signature healthcare law, increasing the chances of a government shutdown.
While stock markets jumped to a record high after the Fed’s announcement, some analysts are warning that the unexpected decision is likely to worsen confusion about the Fed’s plans.
Critics argue that the volatility of the markets may increase in the coming months as investors sort through the Fed’s mixed messages about how much longer it plans to continue its bond-buying campaign.
Bernanke will step down at the end of January. Investors fear that the Fed may ultimately retreat from the stimulus plan, known at quantitative easing 3 (QE3) after President Obama’s nomination of a replacement as soon as next week.
In an effort to encourage a housing recovery and increase the pace of job creation, the Fed started last year adding $85 billion a month to its holdings of Treasury securities and mortgage-backed securities.
The central bank said it would keep injecting money into the economy until the outlook for the labor market improved substantially. It also kept short-term rates near zero hoping that the decision would help the unemployment rate reach below 6.5 percent.
The official unemployment rate currently hovers around 7.3 percent. However, some economists say the real rate is more than 20 percent.
Some critics question the Fed’s assessment of the economy, arguing that unemployment is falling in part because fewer people are looking for work, and therefore are no longer officially counted as unemployed. The Hill