By Jim Puzzanghera
2:19 PM EDT, September 18, 2013
WASHINGTON -- Federal Reserve policymakers unexpectedly voted Wednesday not to alter one of the central bank’s key economic stimulus programs.
The move defied market expectations that the Fed would begin tapering its monthly purchases of $85 billion in bonds this month. The Dow Jones industrial average shot up about 80 points on the news.
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The decision to continue the year-old program at its same pace for at least another month showed concern by Fed officials that the economy is too weak to handle even a small reduction in stimulus.
In a statement issued after its two-day meeting, the policy-setting Federal Open Market Committee said that although there was "growing underlying strength in the broader economy...the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
The Fed also said it was keeping short-term interest rates near zero, holding steady on its other major stimulus program.
The Fed began its latest round of bond-buying -- also known as quantitative easing -- a year ago when the unemployment rate was 8.1%. The Fed has been purchasing $45 billion in Treasury securities and $40 billion in mortgage-backed securities each month.
The goal was to push down mortgage and other long-term interest rates to stimulate the housing market and encourage more spending by businesses. The stimulus helped fuel a housing market recovery as the unemployment rate gradually fell to 7.3% in August.
But interest rates have risen sharply since May, when Fed Chairman Ben S. Bernanke said the central bank could start reducing the purchases this year. The rate for a 30-year mortgage has risen by more than 1 percentage point since May, to 4.57% last week.
The bond-buying program was the Fed's third round of quantitative easing since shortly after the financial crisis.
The first, from March 2009 to March 2010, saw the Fed purchase $1.25 trillion in mortgage-backed securities, plus $200 billion in debt issued by government-backed agencies such as mortgage financing giant Fannie Mae and $300 billion in longer-term Treasury securities.
In the second round, from November 2010 through June 2011, the Fed bought $600 billion in Treasury securities.
The bond-buying, part of the government’s response to the 2008 financial disaster, has increased dramatically the size of the Fed's balance sheet to nearly $3.7 trillion from about $900 billion in mid-2008.
The Fed also downgraded its forecast for economic growth for this year and 2014. It now projects growth of no more than 2.3% this year, compared to as much as 2.6% forecast in June. And next year, the Fed projects the economy will grow between 2.9% and 3.1% compared to a range of 3% to 3.5% in the June forecast.
Join us for a live video chat at 2 p.m. Pacific on the Fed's decision to hold off on a stimulus scaleback. Deputy Business Editor Joe Bel Bruno will be talking about today's news with economy reporter Jim Puzzanghera in Washington and markets reporter Andrew Tangel in New York City.
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