Stocks Hit Record High As Fed Keeps Bond Buying At $85B A Month

The Federal Reserve announced on Wednesday that it would continue its current quantitative easing policies indefinitely, despite the unanimity on Wall Street that a scale-back was imminent. This announcement sent the Dow and S&P 500 to record highs.

According to Bernanke, with the federal funds rate remaining in the 0 – 0.25% range and unable to decrease any further, the central bank’s measures to stimulate the economy have been focused on complementary methods of “asset purchases and forward guidance about short-term interest rates.” For example, in September 2012, the Federal Open Market Committee (FOMC) initiated a stimulus plan to purchase $40 billion per month in agency mortgage-backed securities in addition to the $45 billion per month in longer-term securities that it was already acquiring as part of its Maturity Extension Program (MEP). In December 2012, the Fed announced that it would maintain its $85 billion per month asset purchase program, even after the MEP had ended, by continuing to purchase $45 billion per month in longer-term Treasuries.

However, in June 2013, the Federal Reserve suggested that it would begin a modest reduction in the pace of its purchases by as early as September 2013, and possibly end the program around mid-year 2014. This caused some turmoil on Wall Street over the summer, as the markets tried to adjust to the idea of a departure from the asset purchase program, and consequently lead to a decrease in stock prices and an increase in interest rates.

Bernanke, in his most recent statement this past Wednesday, bolstered the committee’s decision, despite its previous indications to the contrary, by stressing that asset purchases are “not on a preset course.” He stated that the decisions of the FOMC “remain contingent on the economic outlook and on the committee’s ongoing assessment of the likely efficacy and costs of the program.” While we have seen progress in the job market and a reduction of unemployment rate, from 8.1% at the outset of the program to 7.03% today, according to the FOMC, “the economic data do not yet provide sufficient confirmation of its baseline outlook” to warrant the modest reduction mentioned in June.

Bernanke further stated that until the unemployment rate fell well below the target rate of 6.5%, and inflation rates increased to 2%, there would also be no increasing of the federal funds rate. He emphasized that these numbers are not “triggers” but are “thresholds” as to when the central bank would consider such an increase. Bernanke went on to say that the majority of the committee’s participants predicted an increase to take place in 2015, while it would be very modest and would only increase the rate to 1%, well below its normal rate of 4%.