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US Federal Reserve chairman disappoints markets

Category : Business

Ben Bernanke delivers gloomy assessment of US economy and offers no hint central bank will embark on QE3

Federal Reserve chairman Ben Bernanke disappointed markets on Tuesday as he gave a gloomy assessment of the US economy and offered no hint that the central bank might embark on another round of monetary stimulus.

In his twice-yearly report before Congress in Washington, Bernanke said the US economy has weakened and repeated that the Fed was ready to take action to bolster growth if needed. However, he provided no clues about what steps the Fed could take or whether any extension of the Fed’s multi-trillion dollar money-printing scheme, known as quantitative easing or QE, was planned.

Investors had hoped the Fed chief would signal that the central bank was moving close to a third round of bond purchases – or QE3 in market parlance – to support the economy.

“The market was preparing for some signal of imminent policy action from the Fed and they certainly did not get that,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The Fed’s next policy meeting lasts two days and ends on 1 August. The Fed has held interest rates near zero since December 2008 and has bought $2.3tn (£1.5tn) in government and mortgage-related debt in an effort to push long-term interest rates lower.

Despite the Fed’s support, the economy is growing too slowly to lower unemployment. US gross domestic product expanded at a tepid 1.9% annual rate in the first quarter, and economists think its second-quarter performance was even weaker.

However, the Dow Jones index was up 87 points in afternoon trade while the FTSE 100 lost 0.59% to 5629. The euro was down 0.11% at $1.2253.

Confidence in the world economy has been shaken in recent weeks as the three largest economies – the US, China and the 17-country eurozone – have shown increasing signs of weakness.

In China, the world’s second-largest economy, investors likewise hope monetary authorities will provide relief after second-quarter annual growth fell to a three-year low of 7.6%.

Expectations of a further stimulus in China have risen after premier Wen Jiabao’s weekend promise of tax breaks and other aid to struggling small businesses.

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