September 18, 2013

Stock market sets record as Fed keeps stimulus

The Dow Jones industrial average jumps 147 points, or 1 percent.

By MARTIN CRUTSINGER/The Associated Press

WASHINGTON —  In a surprise that sent the stock market soaring, the Federal Reserve concluded Wednesday that the U.S. economy isn't yet healthy enough for the central bank to ease its stimulus even slightly.

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Trader Jonathan Corpina works on the floor of the New York Stock Exchange on Wednesday. The stock market hit a record high Wednesday after the Federal Reserve's surprise decision to keep its economic stimulus in place.

The Associated Press

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Traders Stephen Mara, left, and Edward Schreier work on the floor of the New York Stock Exchange on Wednesday.

The Associated Press

The Fed's cautious message pleased investors, who had expected a slight cut in the bond purchases that have kept long-term interest rates low as the nation recovers from the Great Recession. Wall Street celebrated the prospect of continued low interest rates by lifting stocks to a record high.

In a statement after a policy meeting, the Fed signaled it has no set timetable for reducing the stimulus, which has stood at $85 billion a month for the last year.

Chairman Ben Bernanke explained later at a news conference that there are good reasons to be cautious:

The Fed has yet to see conclusive evidence that the job market and economy are approaching full health.

Mortgage rates have surged, and the bond purchases are needed to hold those rates down and keep home buying affordable for ordinary people.

A budget stalemate in Congress and the threat of a government shutdown as soon as next month are holding back growth and putting the economy at risk.

"Conditions in the job market today are still far from what all of us would like to see," Bernanke said.

Stocks spiked immediately after the Fed released its statement at the end of its two-day policy meeting. The Dow Jones industrial average jumped 147 points, or 1 percent.

The Fed's decision to maintain the pace of its purchases raised hopes for lower rates on bonds and consumer and business loans. Bond yields sank. The yield on the 10-year Treasury note fell to 2.71 percent from 2.85 percent, the biggest one-day drop in nearly two years.

Since May, when Bernanke first signaled that the Fed could reduce its bond purchases this year, average rates on long-term fixed mortgages have climbed more than a full percentage point to near two-year highs. The average on the 30-year mortgage is at 4.57 percent, according to Freddie Mac.

There are signs that higher mortgage rates have made it harder for people to afford homes at a time when the rebound in the housing market has been a key pillar for the economy.

The Fed lowered its economic growth forecasts slightly for this year and next year. It predicts that the economy will grow just 2 percent to 2.3 percent this year, down from its forecast in June of 2.3 percent to 2.6 percent.

Next year's economic growth will be a barely healthy 3 percent, the Fed predicts.

The Fed's policymakers expect the unemployment rate to fall to between 7.1 percent and 7.3 percent by the end of 2013, slightly below its June forecast of 7.2 percent to 7.3 percent. It predicts that unemployment will fall as low as 6.4 percent next year, down from 6.5 percent in its June forecast.

In its statement, the Fed noted that rising mortgage rates and government spending cuts are restraining growth. It repeated a plan to keep key short-term rates near zero at least until unemployment falls to 6.5 percent from the current 7.3 percent. The Fed's short-term rate indirectly affects many consumer and business loans.

"We're in a slow-growth economy with high unemployment and low inflation," said Greg McBride, senior financial analyst at Bankrate.com. "There's no specific catalyst for the Fed to remove stimulus."

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