Ben S. Bernanke Financial markets rallied Wednesday afternoon on the news that the economy is not yet strong enough to start tapering the five-year long quantitative easing program.
Some financial advisers and market watchers described the announcement as bittersweet.
“This is really about the message it sends, because for them not to start tapering of quantitative easing really sends the message that there must be some bad news in the economy that most people don't know about yet,” said Tim Clift, chief investment strategist at Envestnet PMC.
“Almost nobody thought the Fed wouldn't start tapering this month, and that now sends a signal that they're still not comfortable with the financial situation,” he said. “So the faucet remains open, and there's more free money to be had, which is good for the financial markets but it is not a positive for the economy.”
Fed Chairman Ben Bernanke surprised most market watchers when he announced the $85 billion-per-month Treasury buying program would continue uninterrupted for the time being. Equities and gold both rallied on the news, while the yield on the 10-year Treasury bond fell slightly.
“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While “downside risks” to the outlook have dimished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”
Mr. Bernanke and his policy making colleagues held back from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when he first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed's balance sheet to $3.66 trillion.
Stocks and Treasuries soared after the statement. The Standard & Poor's 500 Index climbed 0.9 percent to an intraday record of 1,720.30 at 2:16 p.m. in New York. The yield on the 10-Year Treasury note dropped eight basis points to 2.77 percent.
“Asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on the committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases,” according to the statement.
The Fed's announcement emphasized the stubbornly high unemployment rate, and also included a downward adjustmen! t of projected gross domestic product growth for this year to between 1.8% and 2.4%, from a range of between 2% and 2.6%.
Even as advisers tried to find the silver lining in the announcement by suggesting that the bond rally could be an opportunity for some portfolio re-balancing, it still drew criticism for adding macro risk factors.
“I think the reality is that this has gone on long enough,” said Jeff Leventhal, a partner and managing director at HighTower Bethesda.
“The issue I see here is that if the data doesn't improve at some point and we head in another direction, what tools will we have if we go back into another recession?” he said. “There are consequences to leaving rates too low for too long.”Press Conference
The Fed chairman has orchestrated the most aggressive easing in the Fed's 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008. Bernanke will have an opportunity to explain the Fed's policy strategy at a 2:30 p.m. press conference in Washington.
The central bank today left unchanged its guidance that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
Most Fed policy makers expect the first increase in the nation's benchmark lending rate to occur in 2015, according to projections released today.
The federal funds rate target will be 2 percent at the end of 2016, according to the median of estimates by five governors on the Fed's board and 12 reserve bank presidents. That rate compares with their median estimate of 4 percent for where the rate should be at a time of full employment and stable prices.Inflation Objective
The Fed said that inflation had been running below its longer run objective of 2 percent. The central bank's preferred gauge of inflation climbed 1.4 percent in the year through July. It has not breached 2 percent since March 2012.
Kansas City Fed President Esther George dissented for the sixth meeting in a row, repeating that the policy risks creating financial imbalances.
Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg News survey.
The yield on the 10-year Treasury note has climbed almost 1 percentage point since Bernanke's comments in May, when he first outlined a timeline for tapering, with yields on Sept. 6 exceeding 3 percent on an intraday basis for the first time since July 2011. That compares with 1.61 percent on May 1, and a record-low 1.38 percent in July 2012.
(Bloomberg News contributed to this story)
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