Stock Market Highs As Fed Continues Stimulus
Stock markets have soared worldwide after the Federal Reserve surprised by pledging to continue its massive stimulus effort that has pumped $2.8trn (£1.76trn) into the US economy.
It had been widely expected that policymakers would decide to start to wind down the $85bn a month economy bolstering package.
However, the Federal Reserve said it had decided to hold off on reducing its bond-buying because it was not convinced that the economic recovery would continue if it did so.
Investors ploughed money into stocks and bonds after the decision was disclosed, pushing the Dow Jones to a record high - rising 1% on the day.
Asian markets also rose sharply while in London the FTSE 100 gained 1.3% in early trading on Thursday as investors cheered the prospect of access to cheap cash for the forseeable future.
Announcing his decision, Fed chairman Ben Bernanke said that US unemployment, at 7.3%, was still high and that a recent "tightening of financial conditions" had slowed the rate at which the economy was improving.
He said there was no "magic number" or fixed schedule for when the Federal Reserve would slow or end its bond-buying policy.
Sky News Economics Editor Ed Conway said: "The reason that interest rates have been higher in the states is because people were expecting the Fed to start this tapering process to bring this process of quantitative easing to an end.
"So it's rather an odd situation because he is saying that the mere hint of us actually doing something has been enough to make the markets increase the cost of borrowing and we are a bit worried about it.
"It's rather an odd rationale and it does beg the question of when the Federal Reserve is going to be able to do this and whether it's going to have the nerve to bring quantitative easing to an end."
Quantitative easing, or QE for short, is credited with helping the US economy overcome the deepest slump since the Great Depression.
It kick-started investment, kept interest rates down and wider borrowing rates low and stimulated investor activity worldwide.
Mr Bernanke had indicated in June that the quantitative easing tap may gradually be turned off in a tapering phase making the money markets more nervous than at any time since the stimulus began.
This triggered disquiet in the markets and the mere hint of an end to stimulus caused the Dow Jones industrial average to drop 560 points in two days.
The US central bank is in its third round of quantitative easing since 2008 and has ploughed a total of $2.8trn into the US economy.
In the US, the flood of cheap money lifted stock prices to record highs and put a floor under what had been a reeling housing market.
But while the scale of the bond-buying since the financial crisis has boosted recovery by driving interest rates to record lows, it has left financial markets addicted to the low-cost credit and investors worried about the effect of turning off the taps.
The money also helped push banks and other investors towards risky investments in emerging markets, where the prospect of tapering had resulted in huge withdrawals from currencies and stocks.
Had the Federal Reserve decided to slowdown its economic stimulus there were fears that the knock on effect would see borrowing costs in the UK increase.
The Bank of England has voted not to provide a third round of quantitative easing and minutes from this month's Monetary Policy Committee meeting showed that the last of the policymakers calling for more stimulus have now backed down.
The Federal Reserve announcement came as a White House official disclosed that 67-year-old economist Janet Yellen was the favourite to take over as chairman from Mr Bernanke when his tenure comes to and end in January.
Her chances of taking the top job - she is currently vice chairman - were increased when the front runner, Larry Summers, the former Treasury Secretary, announced his decision to drop out of the race on Sunday.