Kiwi rises after Fed announcement

Federal Reserve chairman Ben Bernanke
Federal Reserve chairman Ben Bernanke
The transtasman currencies continued their relentless climb yesterday, after Federal Reserve chairman Ben Bernanke said he planned to keep interest rates at close to zero until unemployment falls to 6.5%.

The kiwi rose to US84.51c and the Australian dollar was at nearly $US1.06 after the announcement.

Unemployment in the United States is 7.7% but observers believe the more accurate figure is 7.9%. Employees have left the workforce and are not actively seeking work because of a perceived shortage of jobs.

Mr Bernanke also said the Fed would continue to buy $US85 billion ($NZ1 trillion) a month of government bonds and mortgage-backed securities to try to boost the economy.

But changes in the way it did that would mean more money pumped into the economy.

''The committee remains concerned that without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions,'' Mr Bernanke said in a statement.

Fed interest rates have been close to zero for several years and the Fed again kept them below 0.25%.

Craigs Investment Partners broker Chris Timms said surprisingly, the Fed adopted numerical thresholds for future interest policy - something which had not been expected until next year. The Fed had previously said it expected to maintain rates at their current level until 2015. ''But in a news conference, Mr Bernanke said the modified formulation did not mean any change in the committee's expectations. It still anticipates holding rates at the exceptionally low range 'at least through mid-2015','' Mr Timms said.

The stated threshold of unemployment reaching 6.5% should not be interpreted as the committee's longer-run target which remained at 5.2% to 6%. Mr Bernanke said that by tying future monetary policy more explicitly to economic conditions, it should make it more transparent.

Other comments made by Mr Bernanke spooked markets and helped keep the transtasman dollars at their recent highs.

He said the US economy was already being hurt by the fiscal cliff standoff in Washington. The Fed believed the crisis would be resolved without significant long-term damage. The steep tax increases and spending cuts could be avoided with a successful budget deal, he said.

However, the uncertainty surrounding the resolution was already affecting consumer and business confidence and it had led businesses to cut back on investment.

''Clearly, the fiscal cliff is having effects on the economy. I am hoping that Congress will do the right thing on the fiscal cliff. There is a problem with kicking the can down the road.''

Mr Bernanke repeated his belief that if the scheduled tax hikes and spending cuts did take effect on January 1, they would have a significantly adverse effect on the economy, regardless of what the Fed might do.

''We cannot offset the full impact of the fiscal cliff. It's just too big,'' he said.

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