The Federal Open Market Committee (FOMC) concluded its September meeting and announced that it would continue the asset purchase program (popularly referred to as QE3) at the current $85 billion per month pace. Most analysts were expecting the announcement to be of a reduction in bond purchases (popularly referred to as tapering).
The published statement and Chairman Bernanke’s press conference following the meeting explained that the decision to continue purchases at the current level was based on the unevenness of the labor market improvement combined with the threat to continued improvement posed by renewed fiscal policy drama, and the recent tightening of financial conditions. The fiscal policy drama refers to the looming political battles over a federal budget for the upcoming fiscal year (beginning October 1) and raising the debt ceiling (due to be necessary by mid-October). The tightening of financial conditions is the sharp increase in longer-term treasury securities and 30-year fixed mortgage rates (100+ basis points) since May when the Fed first broached the subject of tapering.
Bernanke got some of what he wanted. The interest rate on 10-year treasury securities dropped at 2 pm when the statement was released and closed at 2.69%, 16 basis points below yesterday’s close. This won’t totally reverse the rate increases but it should at least push the pause button on what has been the markets’ overreaction to the mere mentioning of ending QE3. And this respite should pass through to longer-term mortgage rates.
Avoiding a government shutdown or debt default will be up to Congress and the Obama administration, but Bernanke’s message today was clear: monetary policy support for a struggling economic recovery will remain in place for the time being.