Federal Reserve Stays The Course On Stimulus

Sep 19, 2013
Originally published on September 19, 2013 9:44 am
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RENEE MONTAGNE, HOST:

It's MORNING EDITION, from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep.

A big question for watchers of the Federal Reserve is: Why? Analysts are asking why the Fed decided to continue stimulating the economy, buying $85 billion of bonds each month.

MONTAGNE: It was widely expected the Fed would start scaling back that stimulus as the economy improved. But in a statement, the Fed said conditions are not that great.

INSKEEP: Unemployment is still high, and the federal budget is not helping matters. All of that was known, but the markets were still surprised by the Fed's decision.

NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: The Fed has made an effort in recent years not to surprise the markets. It began discussions of dialing back its big stimulus program last spring. And in June, Chairman Ben Bernanke laid out a tentative schedule that had the Fed starting to reduce stimulus late in the year. Lots of economists and investors were convinced that yesterday's Fed meeting would bring that decision. They were wrong.

ANIL KASHYAP: Everybody is going to say, well, I thought I understood what their intentions were, and now, now I realize I didn't quite.

YDSTIE: That's Anil Kashyap, a Fed watcher and professor at the Booth School of Business at the University of Chicago. He says this surprise could lead to confusion in the markets down the road.

KASHYAP: I think this will contribute to some more volatility, because people are going to conclude that they don't really understand exactly what the Fed's thinking.

YDSTIE: At his new conference after yesterday's meeting, Chairman Bernanke defended the Fed's communication strategy.

(SOUNDBITE OF NEW CONFERENCE)

YDSTIE: Bernanke said that Fed policymakers decided to stay the course on the stimulus because economic data on jobs, growth and inflation fell short of the Fed's projections.

(SOUNDBITE OF NEWS CONFERENCE)

YDSTIE: But Kashyap says the rapport the Fed has built with the markets has been damaged.

KASHYAP: The fact that they kind of pulled the football away just as Charlie Brown was running to kick it is going to, you know, cause another round of speculation as to, you know, what are they looking for, and what does it take?

YDSTIE: Bernanke says the framework for assessing the proper time to pull back the stimulus hasn't changed. It's still focused on seeing more robust job growth.

But it's clear one thing that played into the Fed's decision was concern about a potential government shutdown at the end of this month and another damaging fight between Congressional Republicans and the administration over the debt ceiling in October.

(SOUNDBITE OF NEWS CONFERENCE)

YDSTIE: But, Bernanke said, if the Congress fails to raise the debt ceiling and defaults on the debt, there's not much the Fed can to do absorb the shock to the economy.

(SOUNDBITE OF NEWS CONFERENCE)

YDSTIE: In 2011, some Republicans in Congress said they were ready to default on the debt if the Obama administration didn't agree to more budget cuts. The debt ceiling fight went to the last minute and contributed to a downgrade in the nation's credit rating.

One other thing that has concerned the Fed has been a sharp rise in long term interest rates, including mortgage rates. That's happened partly because of the months-long conversation about winding down the stimulus. No doubt policymakers were pleased to see that their decision to keep the stimulus unchanged for the time being led to a sharp drop in interest rates yesterday.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.