The US Federal Reserve's decision to stand pat on the pace of its monthly bond-buying program caught markets by surprise this week. Having already priced in a modest taper, global stocks and bonds initially surged, with the S&P 500 Stock Index hitting a new all-time high on Wednesday. The prices of commodities, including gold and oil, also rose, the US dollar sold off sharply and the yield on 10-year US Treasury notes fell, reflecting a surge in demand that pushed prices higher.
All around the world, observers expected the Fed to begin tapering its quantitative easing program this month, but that didn't happen. The central bank's surprise decision to retain its $85 billion per month bond-buying program sent bond and stock markets surging initially, as investors had priced in a modest monthly reduction of $10 billion to $15 billion of stimulus. While lauded at first, the decision to put off tapering could prolong market volatility and uncertainty as speculation builds over the Fed's future moves. Some observers said it had lost credibility by not delivering what the market felt it had telegraphed.
One possible factor in the Fed's decision to maintain its quantitative easing program is concern that a budget battle now beginning in the US Congress could hurt financial markets and the US economy. The Republican-controlled House has sent the Democrat-controlled Senate a bill to defund Obamacare tied to a temporary government-funding bill. Once the Senate rejects the bill, which majority leader Harry Reid has vowed to do, there will be little time for a compromise deal to avoid a partial government shutdown before October 1. A second crisis looms in mid-October, the deadline for a rise in the US debt ceiling. Failure to meet the deadline could lead the country to default on its debt obligation. Anticipation of this fiscal flare-up was also said to be a factor in the Fed's decision to delay tapering its monetary stimulus.
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The decision by former US Treasury Secretary Lawrence Summers to withdraw as a candidate for Fed chairman also sent markets sharply higher. Summers was seen as less likely to continue the Fed's easy-money policies than fellow contender Janet Yellin, currently the central bank's vice chairman. Reports of sharply higher home prices in China and lower-than-inflation wage gains in the eurozone underscored the global economic challenges ahead. For the week, major global stock indices advanced strongly.
