The Federal Reserve's surprise move yesterday to postpone reducing its economic stimulus program sent stocks soaring and could help the housing market, but it also signals the economy has not rebounded as the Fed hoped, experts said.
"(Outgoing Fed Chairman Ben) Bernanke clearly is suggesting the economy is not ready to walk on its own," said Evan Dangel, a private wealth adviser at Morgan Stanley. "Quite frankly, the last two quantitative easing programs have been largely ineffective in spurring economic growth."
Many analysts had expected the Fed to reduce the amount of bonds it buys per month from $85 billion to between $70 billion and $75 billion. But a spike in mortgage interest rates since the Fed said in May that it would reduce its bond-buying program toward the end of the year led Bernanke to hold steady. Until there is conclusive evidence the economy has improved, the Fed said, the amount will remain unchanged to keep long-term borrowing rates low to boost spending and economic growth.
The Fed also said it plans to keep its key short-term interest rate near zero, at least until unemployment falls to 6.5 percent. The rate was 7.3 percent last month.
"Conditions in the job market today are still far from what all of us would like to see," Bernanke said.
Christopher Geehern, executive vice president of Associated Industries of Massachusetts, said the Fed's downward pressure on interest rates should help the housing market and consumption.
The Standard & Poor's 500 index and Dow Jones Industrial Average rose to record highs on news of the status quo, a jump destined to be short-lived "because what the Fed clearly is signalling is that the economy isn't strong enough to taper off" on stimulus, said Max Wolff, chief economist and strategist for ZT Wealth in New York.
"When you stimulate an economy with policy, there's an element to which the economy becomes dependent on the crutch," Wolff said. "There already are and will be negative side effects — people taking stimulus monetary policy and bidding up the speculative price of assets."
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, said the more of these assets the government holds, "the more of a challenge it will be to unwind them."
"It's sufficiently unknown territory," Frankel said. "They don't want to be in the business long term of holding onto mortgage-backed securities."
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