Wall Street traders work at their posts while United States
Federal Reserve chairman Ben Bernanke broadcasts his
decision not to taper the bond-buying programme. Photo by
The Federal Reserve decision not to ease off on its
money-printing programme caught financial markets by surprise
and Westpac economist Imre Speizer says there will be major
implications for New Zealand.
Interest rates and the value of the New Zealand dollar will
come under pressure after the Fed decided to not stop buying
$US85 billion ($NZ101 billion) of treasury bonds each month.
On Wednesday, $US85 billion converted to $NZ103 billion, such
was the movement in the kiwi yesterday.
Buying the bonds supports the United States stock markets and
global stocks, such as those in New Zealand and Australia,
reap the benefit.
Both the New Zealand and Australian currencies rose on the
news released at 6am yesterday. Markets around the world
responded positively, with many pushing past recent highs.
The prospect of low US interest rates for longer should be a
major relief to emerging markets which had been suffering
from capital flight back to the developed world. Shares in
Mexico and Brazil have already led the way higher.
Mr Speizer said the announcement, along with New Zealand's
improving fundamentals, and a looming rise in interest rates
by the Reserve Bank, should support the dollar at US84c to
US86c during the months ahead.
It was likely the kiwi would fall against the Australian
dollar should the Reserve Bank of Australia continue to ease
interest down from the current 2.5% and the New Zealand
central bank increase from its 2.5% official cash rate, he
Fed chairman Ben Bernanke refused to commit to begin reducing
the bond purchases this year, and instead went out of his way
to stress the programme was ''not on a preset course''. In
June, he said the Fed expected to cut back before year end.
''There is no fixed calendar schedule. I really have to
emphasise that,'' he told a news conference.
''If the data confirm our basic outlook, if we gain more
confidence in that outlook . . . then we could move later
The reaction in markets was swift and sharp. The US dollar
fell to a seven-month low against major currencies and the
price of gold, a traditional inflation hedge, soared more
Craigs Investment Partners broker Chris Timms said the three
major US indices closed at record highs after the
announcement. The Fed said unemployment remained elevated.
''Uncertainty over the strength of the economic recovery was
underlined by the Fed's latest economic growth forecasts. It
cut its forecasts for growth this year to between 2% and
2.3%, compared to the June estimate of between 2.4% and
Mr Bernanke highlighted three reasons why policy makers
decided to hold off scaling back bond purchasing. The were:
the low labour force participation rate, drags on economic
growth due to congressional wrangling over a looming budget
deadline, and the recent rise in mortgage rates.
Mr Bernanke stressed asset purchases were not on a preset
course and the central bank would continue to prop up the US
economy for as long as it felt extra stimulus was needed, Mr
The Fed chairman also expressed frustration at the looming
congressional impasse on whether to raise the limit the US
could borrow to pay down the nation's debt.
''The news of the delay in cutting back on the economic
stimulus took many by surprise. The Fed's thinking reminds us
the global recovery is fragile and we should remain
cautious,'' he said.
Labour markets in key economies had not significantly
improved and the outlook remained dependent on low interest
rates and central bank support.
Interest rates, while likely to rise over the medium-term,
could stay below historic averages for some time, Mr Timms
said. In most markets around the world, equities continued to
offer an attractive yield advantage over fixed income and
''While we expect this gap to close, for the time being
investors are likely to remain focused on equities for