WASHINGTON—The Federal Reserve unexpectedly maintained its $85 billion monthly bond-buying program on Wednesday, sending stock markets soaring and triggering intense debate among economists and investors. Chairman Ben Bernanke cited concerns about tightening financial conditions and fiscal policy headwinds as key reasons for postponing the widely anticipated “taper.”
Market Reactions and Analyst Responses
Equities jumped immediately after the 2 p.m. ET announcement, with the Dow Jones Industrial Average rising 147 points. The decision caught most Wall Street analysts off guard, despite recent mixed economic data.
“I think it’s incredibly wimpy,” said David Kelly, chief market strategist at J.P. Morgan Funds. “If this economy isn’t strong enough to reduce stimulus, what economy would be?”
BlackRock CEO Larry Fink expressed concerns about long-term consequences: “The longer this program runs, the harder it will be to unwind. We’re creating potential bubble conditions.”
Bernanke’s Press Conference Highlights
Revised Economic Outlook
Bernanke revealed the Federal Open Market Committee now believes the economy’s potential growth rate has slowed—a significant acknowledgment of what some economists call “the new normal.”
“Meaningful progress has been made in the job market,” Bernanke said, “but conditions remain far from what we’d like to see.”
Forward Guidance Changes
The Fed chairman emphasized that the 6.5% unemployment threshold wouldn’t automatically trigger rate hikes, suggesting rates could remain near zero even if unemployment falls below that level—especially if inflation stays low.
“We should be very reluctant to raise rates if inflation remains below target,” Bernanke stated, signaling a more dovish stance than previously indicated.
QE Effectiveness Debate
When questioned about quantitative easing’s impact, Bernanke acknowledged measurement challenges but defended the program: “My assessment is that it has been effective,” particularly in housing and auto sectors.
Key Concerns Influencing the Decision
Several factors emerged as critical to the Fed’s thinking:
- Recent rise in mortgage rates and tightening financial conditions
- Ongoing fiscal policy drag from budget battles
- Potential debt ceiling confrontation in October
- Inflation consistently below the Fed’s 2% target
Wall Street Divided on Implications
Reactions from major financial figures reflected deep divisions:
“This is a Yellen Fed now—dovish with a capital D,” said Pimco’s Bill Gross, referencing the likely next Fed chair.
Fisher Investments CEO Ken Fisher offered blunt criticism: “Quantitative easing is an evil… Bernanke is bad, he’s not good.”
Omega Advisors’ Lee Cooperman struck a balanced note: “If the 10-year keeps rallying, so will stocks… but we’re taking away from future returns.”
What Comes Next?
The Fed left open the possibility of tapering later this year but removed previous language about adjusting its asset purchase composition. Most analysts now expect any reduction to begin in December at earliest, with the program potentially running through mid-2014.
As markets digest the surprise decision, attention turns to October’s employment report and Washington’s coming budget battles—factors that may determine the Fed’s next move.
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