Fed Keeps Stimulus In Place, Surprising Wall Street

Sep 18, 2013
Originally published on September 18, 2013 4:36 pm
Hear More: Interview with NPR's Jim Zarroli

Update 2:17 p.m. via AP: The Federal Reserve has decided against reducing its stimulus for the U.S. economy, saying it will continue to buy $85 billion a month in bonds because it thinks the economy still needs the support.

The Fed said in a statement Wednesday that it held off on tapering because it wants to see more conclusive evidence that the recovery will be sustained.

Stocks spiked after the Fed released the statement at the end of its two-day policy meeting.

In the statement, the Fed says that the economy is growing moderately and that some indicators of labor market conditions have shown improvement. But it noted that rising mortgage rates and government spending cuts are restraining growth.

The bond purchases are intended to keep long-term loan rates low to spur borrowing and spending.

The Fed also repeated that it plans to keep its key short-term interest rate near zero at least until unemployment falls to 6.5 percent, down from 7.3 percent last month. In the Fed’s most recent forecast, unemployment could reach that level as soon as late 2014.

Many thought the Fed would scale back its purchases. But interest rates have jumped since May, when Fed Chairman Ben Bernanke first said the Fed might slow its bond buys later this year. But Bernanke cautioned that the reduction would hinge on the economy showing continued improvement.

Update 2:04 p.m. via AP: Stocks have risen sharply after the Fed announced it would keep the stimulus in place. The S&P 500 broke through a record.

12 p.m.: Wall Street has been in a holding pattern today, as investors wait to hear from the Federal Reserve about the future of the bank’s bond-buying programs.

That would be QE4 — the “QE” stands for quantitative easing — the latest version of the Fed’s long term economic stimulus program.

The Fed has been spending over $85 billion a month to buy mortgage-backed securities and longer term Treasury bonds to keep borrowing rates low.

Earlier this year, the bank said it would start tapering that program as the economy recovers. Investors are expecting word on the timing this afternoon, when the Fed concludes its two-day meeting and issues a policy statement.

Here & Now speaks with Marilyn Cohen, founder of Envision Capital Management, and NPR business reporter Jim Zarroli, about what the policy change might mean.


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From NPR and WBUR Boston, I'm Meghna Chakrabarti.


I'm Jeremy Hobson. It's HERE AND NOW.

No taper. That is the word from the Federal Reserve just moments ago. The Fed just wrapped up its policy meeting in Washington. It was widely expected that the Fed was going to back off some of its unprecedented bond buying. But it appears that that is not going to happen, at least not yet. Joining us from Los Angeles is Marilyn Cohen, founder of Envision Capital Management. Marilyn, what do you make of this?

MARILYN COHEN: Well, it's full speed ahead with bond purchases. And I think that this really caught the - all the markets by extreme surprise. Bonds are up, stocks are up, gold is up. And I think everybody was, you know, was on the opposite end of the spectrum thinking finally the Fed is going to stop its bond purchases. But apparently, they're more worried about the economy than we thought.

HOBSON: Yeah. The Dow right now, up about 76 points. It had been lower before this announcement, gold also up just a bit. Oil prices up also on this news. Marilyn, why would they decide to hold off for now on the taper, which a lot of economists had been expecting was going to happen now that we've seen a lot of good months of job creation in this country and signs that the economy was improving?

COHEN: Well, I think that the Fed is worried about what these higher interest rates that we have seen happen since the beginning of May are going to do to housing, which housing is a very, very important component of GDP growth. I think that the Fed is concerned about unemployment, those people that have dropped totally off of the, you know, dropped of and dropped out of looking for any jobs. And, you know, even though economic activity is improving, it's only at a moderate growth rate. And I think they want a stronger economy until - and until that happens, they're going to continue to be full speed ahead.

HOBSON: But the unemployment rate has fallen significantly over the last couple of years. It's down to 7.3 percent at last check. There are going to be many people who are worried now about inflation and the ongoing fear of inflation if the Fed doesn't start to pull back some of its stimulus.

COHEN: Well, people may be worried about inflation, but clearly, the Fed is not. Now, you and I know that the Fed's numbers are not a reality because it doesn't include so many of the components that are extremely important to us, like food and energy. But the Fed is setting the tone. We go by the Fed's numbers because the market goes by the Fed's numbers. And it may not make sense to you and me, but the Fed is clearly not all that optimistic about economic growth.

HOBSON: Marilyn, how does this tie in to what's going on in Washington? We're now on the verge of a potential government shutdown, another fight over the debt ceiling. The Fed, for the last several years, has been crucial to the economy and stimulating the economy with a Washington, Congress and White House that doesn't seem to agree on economic policy.

COHEN: Your point is just a bulls-eye - right on. And I think that, you know, it's the Fed that's ruling the U.S. Not Congress, not the president. I mean, the Fed is probably worried about, you know, a big fight over the increase in the debt ceiling, just like you said. And they are in control, and they want to stay in control. How all of this is going to come down? I mean, it doesn't seem like we can ever get anything done unless we're in a crisis mode. So I think that the Fed wants to keep the markets very sanguine about that they're there for us, and we're going to see more of what we've seen in the past.

HOBSON: And let's take a step back here, Marilyn Cohen, and just explain what we're talking about here, because there are a couple of things we wait for in the Fed's statement. We want to know what the interest rate - the short-term interest is going to be, and that has stayed near zero for years now. But also, what we're talking about here is quantitative easing. This is this enormous $85 billion a month mortgage-backed security and Treasury security bond-buying program that the Fed has been engaged in. Tell us about quantitative easing, what it is and how it's been impacting America.

COHEN: Jeremy, it's just what you said. It's the Fed buying $45 billion a month in U.S. Treasury and $40 billion a month in mortgages. And it really ends up being more than 85 billion because they are reinvesting the income, those coupons that those two types of securities pay. So it means that liquidity is still very plentiful in the financial market. It still means that rates are going to be held - short-term rates that is - artificially low for the time being. And it means that the Fed is clearly very concerned about higher mortgage rates and keeping housing prices and housing sales, you know, moving ahead. So they're propping up the bond market, the stock market, the gold market and the housing market and the economy overall.

HOBSON: And just reading from the Fed's statement here: Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. And it goes on to say that inflation has been running below the committee's longer-run objectives. So just wrapping it up here, Marilyn Cohen. A moment again when people thought that the Fed was going to start to pull back from its bond-buying and it has decided not to do that yet, where are we five years away from the financial crisis? What does this signal to you?

COHEN: It signals that the Federal Reserve does not feel the U.S. economy is strong enough to be on its own back to market mechanisms that you and I were used to pre-2008 financial crisis. So the Fed is still in control at the helm liquefying the system, and it doesn't look like that's going to change anytime soon.

HOBSON: Marilyn Cohen of Envision Capital Management. She's also the author of "Surviving the Bond Bear Market," talking with us about the news just in that the Federal Reserve is not going to taper its bond-buying stimulus programs. Marilyn, thanks so much.

COHEN: My pleasure. Transcript provided by NPR, Copyright NPR.