As you may be aware of by now, yesterday the Fed made news by doing nothing. In fact, it did so little that stock markets around the world jumped dramatically as did gold, US bonds, and just about every currency other than ours. So exactly what didn’t the Fed do yesterday?
In short, the Fed kept in place its programs of trying to stimulate US economic growth, despite widespread belief that it would start to reduce them (known as tapering). For the past year, the Fed has been buying US treasury and mortgage securities to the tune of $85,000,000,000 each month in an attempt to keep interest rates low enough to encourage people to buy houses & companies to borrow. In theory, this work should be reflected in things like stronger employment numbers and improving GDP. Yet, 5 years after the financial crisis, what we really heard from Mr. Bernanke is that the Fed sees an economy that still needs help. The latest GDP figures showed an economy growing at just 1.8% per year, well under the 2-2.5% many wish to see. Unemployment is stuck at 7.3% with a labor force participation rate that is the lowest ever (which acts to make the unemployment rate artificially low). In short, as long as inflation is a meek 1.5% (the last official measurement), there is little to suggest that our economy is ready to be tapered off the Fed’s life support systems.
The markets had been expecting the Fed to do something like start to lower its purchases from $85,000,000,000 per month to something lower like $65,000,000,000, and perhaps remove that spending completely by the middle of 2014. Instead, the Fed did nothing, which the stock & bond markets took as the Fed’s resolve to do whatever it takes to get our economy going. The foot will have to come off the gas at some point, but the Fed told us yesterday that time is not anytime soon.