The Two-Way
12:28 pm
Wed September 18, 2013

Fed Says It Will Continue Stimulus; Markets Reach New Highs

Originally published on Wed September 18, 2013 4:28 pm

The Federal Reserve said today that it is not slowing down its monthly purchase of $85 billion in bonds.

The program is intended to stimulate a sluggish economy and the Fed was widely expected to announce that in light of a recovering economy, it was tapering the bond-buying program. Instead, it delivered a surprise that caused the markets to jump, as the Dow and the S&P closed at record highs.

In a statement issued after a meeting of the Federal Open Market Committee, the Fed said it was awaiting more data on the health of the economy before making a decision on the stimulus program:

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."

In the past the Fed has spooked the markets, when it hinted that the program may be coming to an end. So, as you might expect, the markets reacted joyously at today's announcement.

The Fed also kept its short-term interest rate near zero and released its updated economic projections (pdf). The Wall Street Journal reports that most Fed officials expect the interest rate to rise in 2015 or later.

The paper adds:

"New Fed forecasts for the economy and monetary policy show most officials expect to keep interest rates low well into the future. Ten of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 2% by the end of 2016. 14 of 17 officials said they don't expect the Fed to start raising the fed funds rate until 2015 or later.

"The forecasts also highlight the complex economic environment that Fed Chairman Ben Bernanke confronts. Fed officials, who have been consistently disappointed by economic growth, nudged down their growth forecast for this year and next year, projecting growth between 2% and 2.3% in 2013 and between 2.9% and 3.1% in 2014. Yet Fed officials' view of unemployment hasn't changed much. They expect the jobless rate to keep falling to between 7.1% and 7.3% by the end of next year, which is little changed from their June projections."

Fed Chairman Ben Bernanke is scheduled for a press conference at 2:30 p.m. ET. We'll update this post with what he has to say.

Update at 4:05 p.m. ET. Dow Closes At Record High:

The Dow and the S&P closed at record highs on today's news.

CNBC reports:

The Dow Jones Industrial Average spiked nearly 150 points, setting a fresh intraday-high of 15,709.58. Most Dow components closed in positive territory, lifted by Alcoa and Home Depot.

The S&P 500 jumped to hit a new high of 1,729.44. Both indexes posted their best day since June 13.

One analyst told The Wall Street Journal that the surprise action by the Fed was "a big shock, and it's a massive green light for a risk-on party."

Update at 2:54 p.m. ET. No Set Calendar:

Sounding a lot like he did in July, Fed Chairman Ben Bernanke said the Fed's asset-buying program is not on a set calendar.

"We'll wait for data to make changes, possibly later this year," Bernanke said, adding that the Fed will decide on when to make changes to the program based on three measures — overall growth, the labor market and inflation.

Bernanke was also asked about his future — whether President Obama had asked him not to serve a third term as chairman or if it was his decision.

"I prefer not to talk about my own plans," he said.

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