Brace yourselves and your clients.
Markets are likely in for some volatility as the U.S. Federal Reserve’s decision not to taper its stimulus program may send the message the world’s largest economy is still floundering.
“The Committee decided today to keep the target range for the federal funds rate at 0% to 0.25% and to make no change in either its asset purchase program or its forward guidance regarding the federal funds rate target,” said Bernanke in a press conference.
Read: What to do when interest rates rise
Following a release from the Federal Reserve in advance of Bernanke’s comments, the S&P 500 hit a record high of 1,717.46. The S&P/TSX composite jumped 74.14 points to 12,908.40 — the highest level it’s been since July 2011. And the Canadian dollar surged 0.46 of a cent to 97.59 cents US.
Markets were apparently pleased the rate-setting body will continue to support the economy of Canada’s largest trading partner. What remains to be seen is how they’ll process the news for the remainder of the trading day and into the week as it dawns on buyers and sellers that the news means the recession is now five full years old.
Read: QE pullback could end equity run
The Fed has held firm on stated policy to avoid raising interest rates until U.S. unemployment levels dip below 6.5%, though recent Federal Open Market Committee meeting minutes suggest there actually isn’t consensus among governors about this strategy.
“Apart from some fluctuations due primarily to changes in oil prices, inflation has continued to run below the Committee’s 2% longer-term objective,” Bernanke adds. “Inflation consistently below its objectives could pose risks to economic performance, and we will continue to monitor inflation developments closely.”
Read: Fed beefs up bank capital requirements
In a statement after its meeting, the Fed says the economy is growing moderately and some indicators of labour market conditions have shown improvement. But it notes rising mortgage rates and government spending cuts are restraining growth.
The bond purchases are intended to keep long-term loan rates low to spur borrowing and spending.
Many thought the Fed would scale back its purchases, despite mixed economic reports.
Read: Taper time at the Fed
Bernanke was optimistic about recovery, citing positive employment news over the last 12 months such as the 2.4% uptick in aggregate work hours and dropping claims for unemployment insurance.
“Importantly, these gains were achieved despite substantial fiscal headwinds, which are likely slowing economic growth this year by a percentage point or more and reducing employment by hundreds of thousands of jobs.”
However, he notes the labor force participation rate fell by about 0.3 percentage points, and real wages remained flat.
“In light of this cumulative progress, the FOMC concluded at our June meeting that the criterion of substantial improvement in the outlook for the labor market might well be met over the subsequent year or so.”
But the Fed has a more downbeat outlook on the U.S. economy for 2013 and 2014 than it did three months ago.
It predicts the economy will grow just 2% 2.3% this year, down from its previous forecast in June of 2.3% to 2.6%.
Next year’s economic growth will be a barely healthy 3%.
Read: Traders look to U.S. jobs data
The FOMC affirmed it will not raise rates as long as the unemployment rate remains above 6.5%, “so long as inflation and inflation expectations remain well behaved.”
But this a “threshold, not [a] trigger,” Bernanke emphasized. “A decline in the unemployment rate to 6.5% would not lead automatically to an increase in the federal funds rate target but would, instead, indicate only that it had become appropriate” to consider an increase.
The other threshold is “if inflation were projected to remain below our 2% objective for some time.” He added, “the Committee would also take into account additional measures of labor market conditions such as job gains. Thus, the first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5%.”