Defying market expectations, members of the Federal Open Market Committee meeting in Washington on Wednesday decided to stand pat with their $85 billion-per-month agency debt and mortgage-backed securities purchase program and to keep a low federal funds rate of zero to 0.25%, until they see more economic growth.
“The committee decided to await more evidence that the economic recovery will be sustained,” Chairman Ben S. Bernanke said at a news conference after the meeting. “The economic data do not yet provide sufficient baseline information.”
“They took the conservative option here, which was to push back the taper decision and thereby ensure that the market would not tighten conditions further,” said Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income.
Joshua Feinman, managing director and chief global economist for Deutsche Asset & Wealth Management in the Americas and a former Fed economist, noted FOMC members in their statement dropped previous wording that left open the possibility of further purchases. “Now the only thing that's on the table was either to hold them or cut them. The door is still very much open to beginning the tapering process. What they are trying to convey is if the economy continues to (improve), they're not going to be rushing for the exits.”
The decision to not change course should maintain downward pressure on longer-term interest rates, FOMC members said in the statement.
Mr. Bernanke pointed out several signs of progress, including 3.2 million jobs added, “despite substantial headwinds,” and said that conditions to warrant asset purchase tapering might be met through this year and into 2014.
Mr. Bernanke noted a range of views held by committee members. Of the 17 members, 12 expect the first rate increase to take place in 2015, and most members expect it will rise “very slowly.” The median projection was for the federal rate to rise to 1% in 2015, and 2% in 2016.
“They're pushing off the timing of tapering and signaling what will be a very slow rate hike cycle,” said Prudential's Mr. Tipp. “The bottom line is this should be very market positive — for equities and fixed-income sectors.”