Surprise! The Fed Will Keep Stimulus Intact: Now, Here’s What That Means

Jacqui Kenyon
Posted

federal reserveIn a move that surprised experts around the world, the Federal Reserve announced on Wednesday the decision to leave its bond-buying stimulus program as-is.

A statement released with the decision offered the explanation that the Fed wants more evidence that the recent economic recovery will hold steady.

This means that the Fed will continue to buy a massive $85 billion per month in Treasury bonds and mortgage-backed securities, as well as continue to keep short-term interest rates near zero. Economists and other financial sector experts had speculated that the Fed would begin to gradually pull back—or “taper”—its monthly purchases of bonds by $10 billion to $15 billion at the most.

Stocks dipped and global equity markets lay quiet in the hours leading up to the Fed’s announcement about the future of the program—also known as quantitative easing—which has helped stabilize the U.S. economy in the years since the recession.

What It All Means

Quantitative easing has had a number of significant effects on the U.S. economy since the recession, including driving interest rates to record lows, helping to stabilize a housing market run amok and boosting stock prices to their recent record highs. The program’s overarching goals are to bolster economic and job-market growth.

Prior to the decision, critics of tapering quantitative easing noted that, with job creation barely outpacing population growth and economic growth slow at best, now is not the time for the Fed to pull back.

Additionally, when Fed chairman Ben Bernanke commented earlier this year about the prospect of scaling back the program, it was met with market unease: Stocks lost 5% and interest rates climbed. In contrast, today’s announcement spurred the S&P 500 index to a record high, and, as of late afternoon on Wednesday, the Dow Jones industrial average had jumped 145 points.

There are risks involved to maintaining the program, including eventual high inflation, but quantitative easing isn’t going to go on forever. Despite applying the brakes for now, the Fed may continue with plans to reduce bond purchases by the end of this year.