U.S. Economy
The Federal Reserve is the Punxsutawney Phil of money, and it saw a shadow of weak U.S. growth today. That means no tapering of bond purchases for now and six more weeks of summer for the financial markets.
The Federal Open Market Committee defied widespread forecasts that it would announce the beginning of a cutback in its $85 billion-a-month purchases of Treasury and mortgage bonds. The reasons: The economy is still too weak, and inflation remains below the Fed’s target. The next chance the FOMC will have to cut back bond-buying comes on Oct. 29, the start of its next two-day meeting.
Janet Yellen voted with the majority, as expected. Yellen, the Fed’s vice chair, became the leading candidate to succeed Ben Bernanke as chairman this week after Larry Summers told President Obama that he was withdrawing his name from consideration to avoid a potentially “acrimonious” confirmation process.
The only dissent came from Esther George, president of the Federal Reserve Bank of Kansas City, who “was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,” according to the Fed.
The rate-setting panel said it sees “growing underlying strength” in the economy. “However,” it added, “the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
The decision to hold off on tapering shows that “the Fed is data dependent” and “does not act because the market wants it to,” Douglas Borthwick, a managing director at Chapdelaine Foreign Exchange, said in a note to clients.
Actually, the market may have expected a taper without necessarily wanting one. A continuation of bond purchases helps keep a floor under bond prices and, by extension, supports the stock market. Prices of Treasury bonds rose slightly after the Fed’s surprise announcement. Stocks were up about 0.6 percent minutes after the Fed’s announcement, erasing an earlier decline of as much as 0.3 percent. The Standard & Poor’s 500-stock index climbed to a record.
The Fed also released slightly more pessimistic economic projections by members of the Board of Governors and the 12 district bank presidents. The middle of the range of forecasts for 2013 economic growth fell to 2.0 percent to 2.3 percent in 2013, down from a range of 2.3 percent to 2.6 percent in the June projection. The forecasters were also more pessimistic about 2014 gross domestic product growth, foreseeing 2.9 percent to 3.1 percent growth, down from 3.0 percent to 3.5 percent in June.
The Fed’s decision not to decide on cutbacks caught traders flat-footed. “The market made a big mistake,” Jim Bianco, president of Bianco Research in Chicago, told Bloomberg News. “Wall Street made the mistake of taking silence from the Fed as approval of tapering, when instead the silence was because of a lack of consensus among the policy makers there.”
