Fed Decision Is Relief for Europe
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
The Federal Reserve's unexpected decision to keep its bond-buying program intact gives central banks in Europe more time to nurture still-fragile economic recoveries. Central banks in developing countries will face less pressure to raise interest rates to defend their currencies, but are unlikely to significantly alter their policy stances.
The U.S. central bank said Wednesday it would keep buying $85 billion a month of Treasury and mortgage bonds, surprising many economists who had expected a reduction of as much as $15 billion in monthly purchases.
Europe's main central banks have struggled in recent weeks to convince investors that that their "forward guidance" promising the retention of low interest rates has teeth, in part because investors assumed tighter Fed policies would filter through to Europe. The Fed's decision to leave in place its current pace of bond buying changed that perception.
The decision helps the European Central Bank and Bank of England cement their verbal assurances that interest rates in Europe will stay at record lows in the near term, analysts said. "The fact that the Fed is now even further away from taking away the liquidity punch bowl obviously is going to make it easier for [the] ECB and BOE to manage rate expectations," said Nicholas Spiro, head of consulting firm Spiro Sovereign Strategy.
The Fed's decision to hold off reducing, or "tapering," its bond buying also takes some of the pressure off the ECB and other central banks in Europe to take additional action on interest rates and other stimulus measures, at least in the near term, economists say.
The Swiss National Bank on Thursday kept interest rates unchanged and made no changes to the floor it has set on the Swiss franc's exchange rate to the euro. Norway's central bank also held rates unchanged Thursday.
The fall in bond yields in Europe that followed the Fed announcement should help support the euro-zone economy, which is slowly emerging from 18 months of contraction that began in 2011.
German and U.K. government bonds, which both typically move in tandem with U.S. Treasurys, rose sharply. The yield on the 10-year German government bond, which moves in the opposite direction from prices, fell 0.14 percentage point to 1.81%, the lowest level in a month. The corresponding yield on U.K. bonds was 0.16 percentage point lower at 2.84%, the lowest level in two weeks.
read more ...