In a surprise, Federal Reserve maintains its pace of buying bonds
09/18/2013 9:09 PM
09/18/2013 9:09 PM
A cautious Federal Reserve surprised economists and investors alike Wednesday by standing pat on its massive bond buying program aimed at boosting the economy and job market.
The central bank’s policymakers cited a recent “tightening of financial conditions” as one reason to buck expectations it would begin to taper off its $85 billion-a-month bond buying.
Investors, having braced for a Fed tapering announcement, quickly bid up the prices of stocks and bonds.
The Dow Jones industrial average and the Standard Poor’s 500 each closed at record highs. Higher bond rates produced the biggest one-day drop in interest rates on 10-year U.S. Treasury securities in nearly two years.
The market’s reaction may have been just what the Fed wanted.
For example, falling government bond rates may reverse some of the 1 percent increase in mortgage rates that happened this summer after the Fed first talked about tapering its bond buying. Fed policymakers cited the quick runup in mortgage rates in their policy statement Wednesday.
They were “clearly spooked by the violent increase” in interest rates, said Scott Anderson, chief economist at Bank of the West.
Others said the Fed made the right move because the economic recovery and job market continue to disappoint.
“This took guts,” economist Steven Ricchiuto of Mizuho Securities wrote in a note to clients. “After leading the market down the tapering path, the Fed decided the improvement in the labor market was not as broad as they had expected and decided not to taper.”
In a news conference after the Fed’s policy meeting, chairman Ben Bernanke called the Fed’s decision “a precautionary step.”
The Fed’s policy statement cited “the extent of the federal fiscal retrenchment” and “the tightening of financial conditions observed in recent months” for holding off on any change in its policy.
Policymakers “decided to await more evidence that progress (in the economy and job market) will be sustained before adjusting the pace of its purchases,” the Fed’s statement said.
Bernanke also cited Washington’s coming battles over the budget, taxes and the nation’s debt ceiling as threats to the recovery’s pace. The Treasury is expected to reach its borrowing limit next month unless Congress agrees to raise the limit.
“This is one of the risks we are looking at,” he said.
In the session with reporters, Bernanke also backed away from perceived commitments about when the Fed would begin to taper its bond buying.
Bernanke said tapering could begin “possibly later this year,” which was taken as weaker than earlier comments. He also sought to weaken expectations, driven by earlier comments, that the Fed hoped to end the bond buying about the time unemployment fell to 7 percent.
Unemployment stood at 7.6 percent when the Fed talked in May about tapering and is 7.3 percent currently.
“There’s not any magic number,” Bernanke said.
The Fed is expected to reconsider its bond buying program when it meets again Oct. 29-30.
Bernanke said the Fed’s decision will be driven by a broad reading of the labor market rather than just the unemployment rate specifically. He repeatedly said future decisions on the bond program would be driven by the economic data available when they’re made.
“I think he threw a little dust in the air to cloud the vision forward,” said Ken Green, president of Mitchell Capital Management Inc. in Kansas City.
For the sixth time this year, the Fed’s decision drew a dissenting vote from Esther George, president of the Federal Reserve Bank of Kansas City. She dissented over concerns the Fed’s actions may increase the risks of future economic and financial imbalances.
George, who had voted against every Fed policy statement this year, said in a Sept. 6 speech that “it is time” for the Fed to start cutting back. She had prescribed reducing bond purchases to about $70 billion a month, with the aim of ending them by mid 2014.
The Fed began a year ago to buy $85 billion in U.S. Treasury bonds and securities backed by home mortgages each month in an effort to lower long-term interest rates. Lower interest rates are aimed at making it easier to borrow and buy big-ticket items such as houses and cars. They also are aimed at supporting prices of stocks.
Bernanke said the Fed’s bond buying has helped the job market too. He said the decision Wednesday to delay the tapering stemmed from the Fed’s desire to be more confident the improvements would be sustained.
Conversely, economist Allan Meltzer called the Fed’s delay a mistake. He said its purchases already have funneled $2 trillion into the excess reserves of banks and at some point would need to be removed. Buying more bonds, at the pace of $1 trillion a year, only makes the exit more difficult, he said.Updated Fed forecasts
Fed members’ forecasts show the economy growing by 2 percent to 2.3 percent this year, down from a June forecast range between 2.3 percent and 2.6 percent. Next year will see 3 percent growth.
Fed policymakers expect unemployment to decline to between 7.1 percent and 7.3 percent by the end of the year, slightly below the June forecast of 7.2 percent to 7.3 percent. They predicted unemployment as low as 6.4 percent next year, down from 6.5 percent forecast in June.