Federal Reserve Maintains $85B Stimulus, Stock Markets Rally

The stock markets in the United States rallied to a new record high after the Federal Reserve surprisingly maintained its $85 billion monthly stimulus or bond-buying program. Policy makers were concerned that the sudden increase interest rates in the previous months could hamper the slowly growing economy.

Over the past several weeks, majority of economists anticipated that the Federal Reserve would taper its monthly bond purchases by $10 billion to $75 billion based on data compiled by Bloomberg. However, policy makers decided to wait and monitor the progress of the economy.

Federal Reserve Waits for More Economic Progress

The Federal Open Market Committee (FOMC) said, “The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The FOMC emphasized that it would “closely monitor incoming information on economic and financial developments” over the next several months. The committee also stated, “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”

Furthermore, the policy maker said, “Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.

The Federal Reserve reduced its economic growth forecast for 2013 in the range of 2% to 2.3% lower than its estimate of 2.3% to 2.6% last June.  By 2016, the Fed projected that the economy would in the range of 2.5% to 3.3%.

The policy makers also maintained their position that the central bank will not start raising rates until the unemployment rate declined to 6.5%. The unemployment rate in the country was 7.3% last month.

During a press conference, Federal Reserve Chairman Ben Bernanke emphasized that tapering depends on the progress of the economy and it is not a “preset course.”  He said, “We could begin later this year. Even if we do that, the subsequent steps will be dependent on continued progress in the economy. We are tied to the data. We don’t have a fixed calendar schedule.”

Stock Markets Surge to New Record High

Following the announcement of the Federal Reserve, the stock markets in the United States rallied to a new record high. The Dow Jones Industrial Average (DJIA) surged by 147.21 point or 0.95% to 15, 676.94, above its recorded highest level of 15,658.36 on August 2.

The S&P 500 increased by 20.76 points of 1.2% to 1,726.52, higher than its record high level last month at 1,709.67. The Nasdaq climbed by 37.94 points or 1% to 3,783.63 and the Russell 2000 rose by 10.58 points or 0.99% to 1,076.97.