Update | Fed surprises markets, sticking with stimulus as growth outlook falls

The US Federal Reserve defied investor expectations on Wednesday by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.

Investors responded by propelling US stocks to record highs and driving down bond yields. Yields on US Treasury debt had risen over the summer on expectations the Fed would cut back its US$85 billion a month in bond purchases that have been the cornerstone of its efforts to spur the economy.

Furthermore, Fed Chairman Ben Bernanke refused to commit to begin reducing the bond purchases this year, and instead went out of his way to stress the program was “not on a preset course.” In June he had said the Fed expected to cut back before year end.

“There is no fixed calendar schedule. I really have to emphasise that,” he told a news conference. “If the data confirm our basic outlook, if we gain more confidence in that outlook ... then we could move later this year.”

The reaction in markets was swift and sharp. The US dollar fell to a seven-month low against major currencies and the price of gold, a traditional inflation hedge, soared more than 4.0 per cent.

“The Federal Reserve remains quite concerned about the overall sluggishness of the economy, preferring to take the risk of being too loose for too long as opposed to tighten prematurely,” said Mohamed El-Erian, co-chief investment officer at Pimco, which manages the world’s largest mutual fund.