Analysis: Fed delay both delights, confounds investors

Wed Sep 18, 2013 7:52pm EDT
 
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By Steven C. Johnson

NEW YORK (Reuters) - Wall Street's knee-jerk reaction to the Federal Reserve choosing to keep the pedal to the monetary policy metal was loud and clear on Wednesday: Buy Buy Buy!

That initial exuberance, however, masks a nagging worry and no shortage of confusion about the Fed's reluctance to act after the central bank had positioned markets for a reduction in its $85 billion per month bond buying program. It left many investors in a fog about what comes next.

The trading day certainly did not unfold as expected. The vast majority of investors were bracing for a modest reduction in the Fed's monthly purchases of U.S. Treasury debt and mortgage bonds.

But citing concerns about low inflation, the impact of a recent rise in long-term interest rates on housing, and headwinds from Washington's "fiscal retrenchment," the Fed said it needed to see more economic improvement before acting.

The Fed's refusal to start to bow out of the asset-buying game sent stocks soaring, with the benchmark U.S. S&P 500 index closing at a record high.

"The Fed is sending a message that the economy is weak, and that's confusing," said Wayne Kaufman, chief market analyst at Rockwell Securities. "I would've been happier if there had been a small taper to prepare the investing public to the idea."

Fed Chairman Ben Bernanke first suggested in May that the central bank could pull back on its bond purchases late this year if economic growth continued to gain traction, as he predicted it would in the second half of this year and in 2014.

That caught markets flat-footed in the spring and pushed up bond yields and mortgage rates by more than a percentage point over three months, slowing momentum in the U.S. housing market recovery.   Continued...

 
The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. REUTERS/Jonathan Ernst