US Fed turns the table on investors; holds off on tapering.

In a surprise decision, the US Federal Reserve on Wednesday said that it would keep the US bond spree at an $85 billion monthly pace for now, stating worries that a sharp rise in borrowing costs in recent months could reflect on the economy.

The decision amazed the financial markets, which were prepared for an unassuming cut in the central bank’s stimulus programme, and Fed Chairman Ben Bernanke snubbed to carry out a tapering of purchases later this year, as he had earlier recommended.

As said at the news conference, “there is no fixed calendar schedule. I really have to emphasize that. If the data confirm our basic outlook, if we gain more confidence in that outlook … then we could move later this year.”

In the backdrop of the US central bank’s decision, the dollar fell to a seven-month low against the euro, while prices for US government bonds climbed sharply. The price of gold, a customary inflation guard, also jumped higher.

The Fed indicated stress in the economy from stiff fiscal policy and higher mortgage rates as it clarified why it decided to uphold asset purchases at the current pace.

In a statement it said “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market.”

However, the Fed said the economy was still growing, despite tax hikes and budget cuts in Washington.

According to agency inputs he said “taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labour market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.”

The Fed has held rates near zero since late 2008 and has more than tripled its balance sheet to more than $3.6 trillion through three rounds of huge bond purchases meant to bring down the borrowing costs.

The Fed restated that it will not begin to increase rates until unemployment falls to 6.5 percent and so long as inflation does not intimidate to go above 2.5 percent. The unemployment rate in US in August was 7.3 percent.