The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs more evidence of lasting improvement in the economy and warning that an increase in interest rates threatened to curb the expansion.
“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference today in Washington after a two-day meeting of the Federal Open Market Committee. “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”
U.S. stocks rose, sending the Standard & Poor’s 500 Index to a record, while Treasuries and gold rallied as Bernanke stressed that the pace of bond buying would be dependent on economic data, and the Fed has no predetermined schedule for tapering the purchases that have pushed its balance sheet to $3.66 trillion.
“There is no fixed calendar schedule, I really have to emphasize that,” Bernanke said. “If the data confirm our basic outlook” for growth and the labor market, “then we could begin later this year.”
The S&P 500 climbed 1.2 percent to 1,725.48 at 4:02 p.m. in New York. The yield on the 10-Year Treasury note dropped 15 basis points to 2.70 percent. Gold for immediate delivery jumped $55.61 to $1,366.25 an ounce. Oil rose more than 2.5 percent.
“It looks like the Fed has done a major reset in terms of expectations on what they need to see before they start to taper,” said Chris Rupkey, the chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
The central bank, in a statement, left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
Bernanke added in his press conference that the first interest-rate increase may not come until the jobless rate is “considerably below” 6.5 percent.
“Even after asset purchases are wound down,” Bernanke said, the “Fed’s rate guidance and its ongoing holdings of securities will ensure that monetary policy remains highly accommodative, consistent with an aggressive pursuit of our mandated objectives of maximum employment and price stability.”
Bernanke said the Fed could also specify that it would not tighten if inflation was too low. “An inflation floor is certainly something that could be a sensible modification or addition to the guidance,” he said.
Fed officials today reduced their forecasts for economic growth this year and next. They forecast U.S. gross domestic product to increase 2 percent to 2.3 percent this year, down from a June projection of 2.3 percent to 2.6 percent growth.
“They feel the risks are too great to taper now, and the economy is not growing as fast as they had hoped,” said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina. “They are going to take a few more months and maybe start in December.”
Economists had forecast the FOMC would dial down monthly Treasury purchases by $5 billion, to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg News survey.
Fed officials were spooked by an increase in bond yields that followed Bernanke’s comments in May that the Fed may step down the pace of purchases in the “next few meetings,” said Scott Brown, chief economist for Raymond James & Associates Inc. in St. Petersburg, Florida.
The yield on the 10-year Treasury note climbed almost 1 percentage point through yesterday since Bernanke’s May 22 comments, with yields on Sept. 6 exceeding 3 percent on an intraday basis for the first time since July 2011. That compares with 1.61 percent on May 1, and a record-low 1.38 percent in July 2012.
“They were really surprised back in May and June by the market’s response to the initial talk of tapering,” Brown said. “The Fed’s view was that it’s the amount of asset purchases, not the monthly pace that matters. In that case, it doesn’t matter whether they start tapering in September or December, but the markets decided it does, so it does matter.”
“We’re seeing the reaction that bond yields are coming down, and that’s got to be helpful for their outlook.”
Kansas City Fed President Esther George dissented for the sixth meeting in a row, repeating that the policy risks creating financial imbalances.
Higher interest rates have started to take a toll on housing, one of the drivers of the expansion. A Commerce Department report today showed that builders began work on fewer U.S. homes in August than projected by economists.
Housing starts rose 0.9 percent to a 891,000 annual rate, following the prior month’s 883,000 pace that was weaker than previously estimated. The median estimate of 83 economists surveyed by Bloomberg called for 917,000. Permits, a proxy for future projects, dropped more than forecast.
The average interest rate on a 30-year fixed home loan was 4.57 percent last week, compared with a record-low 3.31 percent in November 2012, according to Freddie Mac. The rate soared 35 percent in 10 weeks ended July 11, the most ever for a comparable period, the data show.
Bernanke, who is nearing the end of his second term as chairman, has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008.
Vice Chairman Janet Yellen, a supporter of Bernanke’s policies, is the top candidate to succeed him after former Treasury Secretary Lawrence Summers withdrew from contention, according to people familiar with the process.
The Fed’s asset purchases have fueled gains in asset prices. Counting today’s increase, the S&P 500 Index has climbed 23 percent since Aug. 31, 2012, when Bernanke made the case for further monetary easing at the central bank’s annual forum in Jackson Hole, Wyoming.
Officials have also credited the program, which began last September, with reducing the unemployment rate, which is the lowest since December 2008. Officials have said that they would maintain bond purchases until the labor market has “improved substantially.”
At the same time, recent data on payrolls, housing and retail sales have lagged behind economists’ forecasts.
U.S. companies created 169,000 jobs last month, fewer than economists projected, and increases in the prior two months were revised down. The unemployment rate fell as workers left the labor force. August and July were the weakest back-to-back months for payroll gains in a year.
Employment growth has nevertheless improved since the bond purchases began. The U.S. has added an average of 160,000 jobs over the past six months, compared with 97,000 originally reported for the half-year before the Fed decided to start the third round of purchases a year ago.
Faster employment gains may be needed to spur the consumer spending that accounts for 70 percent of the economy. Retail sales last month rose less than forecast, with purchases climbing 0.2 percent, the smallest gain in four months, the Commerce Department reported last week.
Homebuilding and manufacturing remain bright spots for the economy.
Companies such as Hovnanian Enterprises Inc. have said the recent rise in mortgage rates will temporarily restrain the housing recovery rather than end it.
Homebuilder confidence held this month at the highest level in almost eight years, even as mortgage rates rose. The National Association of Home Builders/Wells Fargo confidence index registered 58 this month, matching August’s revised reading as the strongest since November 2005.
Such optimism has found fuel from a recovery in home prices that pushed up the S&P/Case-Shiller (SPCS20Y%) index of values in 20 cities by 12.1 percent in June from a year earlier.
Factories turned out more cars, appliances and home furnishings in August, propelling the biggest increase in U.S. industrial production in six months. Output at factories, mines and utilities rose 0.4 percent after no change the prior month, the Fed reported this week.
Cars and light trucks sold last month at the fastest annualized rate since 2007, according to researcher Autodata Corp. Sales at General Motors Co., Ford Motor Co. (F:US), Toyota Motor Corp. and Honda Motor Co. all exceeded analysts’ estimates.
Texas Instruments Inc., the largest maker of analog chips, is among companies with a brighter outlook as global markets stabilize.
“Orders continue to be quite solid” this quarter, Chief Financial Officer Kevin March said at a Sept. 11 conference. “We continue to see strength in three of the four regions of the world,” with Asia, Japan, and the Americas expanding, he said.
To contact the reporters on this story: Joshua Zumbrun in Washington at firstname.lastname@example.org; Jeff Kearns in Washington at email@example.com
To contact the editor responsible for this story: Chris Wellisz at firstname.lastname@example.org