The Federal Reserve surprised everybody by deciding to keep the $85 billion monthly Fed stimulus package intact.
U.S. stocks responded by reaching a record high on Wednesday. The S&P 500 gained almost 1%.
Experts say that the Fed stimulus package (bond-buying program) is why Wall Street has risen by over 20% in 2013.
According to what the Federal Reserve said yesterday, it does not look as if they will taper off next month either.
In theory, not taking its foot off the accelerator pedal is bad news. Why would the largest economy on the planet still need to pump emergency money at the same rate as one year ago? Wasn’t the Fed stimulus package an emergency plan?
In practice, however, the Markets in the U.S. and worldwide cheered. In reality, although the American economy, as well as other major ones including the European Union, China and Japan are showing clear signs of recovery, the global financial system is still a whacky place.
Fed stimulus package will change when unemployment…
Ben Bernanke, who has been Chairman of the Federal Reserve since February 2006, said last July that he would like to see “significant improvement” in the labor market before considering reducing the $85 billion per month stimulus program.
In a statement made yesterday, the Board of Governors of the Federal Reserve said:
“Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. 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.”
Over the last few months there has been an improvement, with unemployment reaching a five-year low. However, as Stephanie Flanders, Economics Editor for the BBC said “that has been almost entirely due to people dropping out of the workforce. If the labour force participation rate today were the same as it was in 2008, the unemployment rate would be over 10.5%.”
Bloomberg quoted Lou Crandal, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, who had predicted the Fed would reduce its bond buying, as saying “The overriding message the Fed wants to send is that it remains completely committed to providing as much support as necessary. The Fed’s goal in surprising the market here was to really cement the credibility of its interest-rate guidance by showing its primary concern is encouraging growth.”
Crandall thinks the Fed will taper off in December, but adds that the program may continue well into Q3 of 2014.