Commodity Trade Mantra

The Fed Stands Pat On Bond Buying – Bernanke’s “No Taper” Shocker

The Fed Stands Pat On Bond Buying - Bernanke's "No Taper" Shocker

The Fed Stands Pat On Bond Buying – Bernanke’s “No Taper” Shocker

The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more signs of lasting improvement in the economy. “The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day FOMC meeting. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.” “Asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases,” according to the statement. Economists had forecast the FOMC would taper down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg News survey.

The central bank today left unchanged its guidance that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

Most Fed policy makers expect the first increase in the nation’s benchmark lending rate to occur in 2015, according to projections released today. The federal funds rate target will be 2 percent at the end of 2016, according to the median of estimates by five governors on the Fed’s board and 12 reserve bank presidents. That rate compares with their median estimate of 4 percent for where the rate should be at a time of full employment and stable prices.

Wall Street hits new highs on the Fed’s “No Taper” Shocker

U.S. stocks rallied to a record high after the Federal Reserve surprised investors by saying it would not begin to cut its bond-buying program that has been a driving force behind Wall Street’s climb of more than 20 percent this year.

Market participants had largely been expecting the central bank to begin “Taper” – a withdrawal of the bond-buying program by about $10 billion a month.

No taper, the market loves it, we will see if that lasts but boy, we are off to the races,” said Brad McMillan, Chief Investment Officer for Commonwealth Financial in Waltham, Massachusetts.

“From a short term stock market perspective it can be seen as a good thing because the market likes to see continued Fed stimulus. From a real economy standpoint, what it says is the Fed is actually more nervous about the economy than is generally perceived.” Materials stocks rallied as the dollar fell to a seven-month low versus the euro and gold rallied after the announcement.

Looking beyond the Fed, market participants had an eye on the looming budget and debt limit debate in Washington. The White House said Wednesday the latest Republican proposal moves away from compromise.

Fed Stands Pat On Bond Buying

Highlights:

Federal Reserve officials on Wednesday kept the central bank’s $85 billion-per-month bond-buying program in place, saying that they wanted to see more evidence that the economy can sustain improvement before scaling back its bond purchases, but they made clear that they are poised to reduce the program if they saw more evidence of a strengthening economy.

Fed officials pointed to concerns that financial conditions had tightened in recent months and that those conditions could slow the economy if sustained.

Fed officials were on the fence in the days leading up to the meeting, even though many investors were convinced the central bank would make a small reduction to the bond-buying program at the September meeting.

The Fed’s policy-making committee said it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases” in the formal statement released after the meeting. The Fed said its bond purchases were “not on a preset course.”

The Fed employed the latest round of bond buying about a year ago in a bid to push down long-term interest rates and spur more investing, spending and hiring. So far this year it has been buying $85 billion per month in mortgage and U.S. Treasury bonds.

Fed officials also voted to keep short-term interest rates near zero, where they have been pinned since late 2008. Most Fed officials indicated in their latest economic projections, also released Wednesday, that they expect to make the first interest-rate increase in 2015 or later.

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.

And here is where Hilsenrath gets downright apologetic:

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.

In other words, the persistently wrong Fed will continue doing more of what has failed to achieve any success to date. What can possibly go wrong?

Posted earlier – Markets Have Priced In A Taper Lite, But What If We Get A Taper Zero?

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