By Greg Robb and Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve on Wednesday stuck to its massive bond-buying strategy, citing softer U.S. growth in a move that stunned financial markets.
By a 9-to-1 vote, the Fed chose to keep buying $85 billion a month in debt and said it would wait for more evidence of economic progress.
Stocks hit intraday records on news the Fed wouldn't taper its bond-buying plan.
The bank cited rising mortgage rates and reduced federal spending as headwinds that “could slow the pace of improvement in the economy.” Read text of FOMC statement.
In a press conference, Fed Chairman Ben Bernanke said the bank might still scale back its purchases before the end of the year, but it will depend on whether growth and the pace of hiring show greater strength.
“We could begin later this year, but even if we do that, the subsequent steps will be dependent on continued progress in the economy,” Bernanke said. “So we are tied to the data. We don’t have a fixed calendar schedule.”
Bernanke also reiterated that the Fed has no plans to raise short-term interest rates any time soon. The vast majority of bank policymakers don’t expect rates to rise until 2015 at the earliest, and even then, they probably won’t top 2% until at least three years from now.
After the Fed’s announcement, stocks shot into positive and the S&P 500 ended the day at a record high. Gold futures climbed by $56 an ounce. The yield on the 10-year Treasury dropped by 16 basis points.
The Fed’s decision to stand pat surprised many on Wall Street, who had expected a “tiny taper” in a range of $10 billion to $20 billion. The central bank has been buying huge amounts of Treasurys and mortgage-backed securities in a strategy to keep interest rates low and stoke economic growth.
Yet the main reason mortgage rates have surged is because the Fed signaled over the summer that it planned to trim bond purchases. The backup in mortgage rates underscores how tricky it will be for the bank to reduce bond purchases without cause disruptions to the broader economy.
“By delaying the Fed may be attempting to lean against long-term rates, which have risen quickly since talk of tapering heated up,” said senior economist Ryan Sweet of Moody’s Analytics.
In a statement, the central bank pointed to an elevated unemployment rate, now at 7.3%, and said government spending cuts and rising mortgage rates are “restraining economic growth” in key areas such as housing.
“Clearly the Fed has been spooked by the extent of the surge in long-term interest rates over the past couple of months and the impact that now appears to be having on the housing market,” said Paul Ashworth, chief U.S. economist at Capital Economics.
Fed officials are also worried about another budget standoff in Washington that could undermine growth. The economy has been hampered by federal spending cuts and previous budget battles have cause temporary disruptions in the U.S. economy.
Federal Reserve Board Chairman Ben Bernanke in July “I think that a government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy,” Bernanke said.
Still, the central bank’s seeming change of heart on tapering risks confusing investors and triggering more volatility in financial markets. The Fed insists the economy has improved over the past year at the same time it’s citing new risks to growth.
Although the Fed cut its U.S. growth forecast for 2013 for a third time, the bank expects the economy to accelerate in 2014 and 2015.
Unemployment could fall below 6% by and then and inflation is projected to rise no higher than 2% — well below the Fed’s 2.5% threshold. Read more about Fed’s forecast for 2013 to 2016.
Every member of the bank’s policy-making Federal Open Market Committee supported the decision except for Esther George, president of the Kansas City Fed.
Janet Yellen, seen by many as Bernanke’s successor if he steps down next year as expected, also voted to keep the current policy intact.
Bernanke declined to comment on his status. “I hope to have more information for you at some reasonably soon date,” he said.
The minutes of the latest Fed meeting will be released on October 9. The Fed will meet again on Oct. 29-30.
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