No Taper is Bad News

Every genius on Wall Street was looking for a $10-15 billion reduction in Q.E. Hey, that's why the get the big bucks (HA!,HA!). The bulk of Fed the governors were leaning that way in varying degrees. For the Fed to do nothing means that they see inherent weakness in the economy that would be exacerbated by rising interest rates. My guess is that the weak August jobs report and the sharp downward revisions to June and July have given the Fed pause for thought. They also have to be concerned about the upcoming food fights over the debt ceiling, budget and Obamacare.

 

No Taper: Bernanke Keeps QE Spigot Open As S&P 500 Surges To Record Highs

Investors are waiting for the Chairman's press conference - Image credit: AFP/Getty Images via @daylife

Fed Chairman Ben Bernanke surprised many on Wednesday, as the FOMC decided not to taper quantitative easing.  Keeping the monetary spigot open, with the Fed’s balance sheet expanding at a rate of $85 billion a month, the FOMC pointed to tighter monetary conditions, particularly rising mortgage rates, and fiscal restraint, as the sequester works its way through the system and ahead of what could be a battle in Washington over the debt ceiling, as its reasons not to cut back on monetary stimulus.
With general expectations focused on a Fed taper of $5-$15 billion, traders raced into stocks in the aftermath of the decision.  All three major U.S. equity indexes surged with the S&P 500 hitting an all-time high, as did gold and oil, while the yield on 10-year Treasuries moved up to 2.868%.
FOMC statement noted the Fed acknowledges the economy continues to strengthen, yet Bernanke & Co. also recognized the challenges facing the market and the economy.  “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” read the statement, which also made references to the fact that “mortgage rates have risen further and fiscal policy is restraining economic growth.”
The Fed also issued its economic projections.  FOMC participants now expect GDP to come in between 2% and 2.3% this year, down from 2.3% to 2.6% last time, and the unemployment rate to come in at 7.1% to 7.3%, down one-tenth of a percent on both ends of the range.  Three Fed officials expect the first rate hike to come in 2014, 12 expect it in 2015, and two in 2016.  The central forecast for the 2016 rate path is around 1.75% to 2%.