Federal Reserve Opts to Maintain Stimulus

Central bank surprises markets by choosing not to begin end of its QE3 asset-purchase program.

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Federal Reserve Chairman Ben Bernanke will wait for more data before beginning the long-awaited tapering of the central bank’s quantitative easing program.

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The Federal Reserve Wednesday decided to maintain its aggressive $85-billion-a-month asset-purchase program known as QE3, while also cutting its forecast of U.S. economic growth for next year to 2 percent to 2.3 percent from the prior 2.3 percent to 2.8 percent.

[READ: Taper Talk Peaks Ahead of Federal Reserve Meeting]

The decision surprised many in the economic world who had expected a gradual reduction in the amount of the monthly purchases of anywhere from $10 billion to $15 billion. 

The announcement was greeted warmly by the markets, however, with the S&P 500 index rising to a new record of 1,714 on word of the news.

Greg McBride, senior financial analyst at Bankrate.com, said before the announcement that the Fed's move "would be a game-time decision." He added, "It is inevitable whether it happens this month or next."

The Fed has been buying $85 billion in treasury bonds and mortgage-backed securities with the aim of keeping interest rates low to goose the economy, a program it first announced back in Sept. 2012. The Fed had put no date on when the program would end, but Chairman Ben Bernanke signaled in June that the Fed would begin trimming back its purchases depending on improving economic data. The unemployment rate has been slowly declining, while the housing market has been steadily recovering.

[READ: Fed Stays the Course on QE3, But for How Long?]

Markets had been on edge this summer over the possibility of the so-called taper, but in recent days had begun to rise in anticipation of the actual move and the belief it would be a gradual one. After reaching a trough in May, mortgage rates have also been on an upward trend with the average on the 30-year fixed loan rising more than a percentage point since then to about 4.70 percent. Interestingly, though, auto and other consumer loan rates, which hew to short-term interest rates, have remained near their historic lows.

The Fed statement accompanying the announcement said the central bank wanted to wait for "more evidence that progress will be sustained" before it starts to cut back on its asset purchases. The Fed also noted that rising mortgage rates and curbs in government spending were restraining the economy from a higher growth rate. In the absence of meaningful fiscal policy from Capitol Hill – indeed, amid a failure to come to any sort of agreement on a budget or reducing the federal deficit, and with the threat of a looming government shutdown – the Fed's asset-purchase program has been the single most important piece of macroeconomic policy.

"The primary goal here is to push money into riskier assets, whether it's equities or the housing market," McBride says. He adds that by keeping long-term borrowing costs low, the Fed has also encouraged businesses to take on debt to finance acquisitions, buy back stock, or pay dividends.

Some analysts speaking ahead of the decision suggested that if Bernanke and his colleagues chose not to taper in September, it might be because of concern about what is happening in Congress. Bernanke has frequently criticized lawmakers for their inaction on dealing with long-term, structural issues in the American economy including the rising cost of entitlement programs.

[READ: Summers Drops Out of Running for Fed Chairman]

The Fed's announcement comes as President Barack Obama weighs who should replace Bernanke when his term expires in January. Former Treasury Secretary Larry Summers had appeared to be Obama's favored choice, but he withdrew from consideration after several Democratic senators indicated they could not support him, in part because of controversial remarks he had made about women's aptitude for math and science education while president of Harvard University. Summers also was viewed by some in Congress as too cozy with Wall Street. Fed Vice-Chairman Janet Yellen, a favorite of Fed insiders and the economics community, is considered a viable candidate but Obama has not indicated any support for her.

A Pew Research survey released Tuesday found that Bernanke was viewed more favorably than unfavorably by the public, 38 percent to 31 percent with 32 percent unable to provide a rating. The survey found that Republicans view Bernanke less favorably, with 42 percent viewing him unfavorably and 32 percent favorable. The views were closely tied to the performance of the stock market, with those viewing him more favorably saying the stock market has fully recovered from the Great Recession.