The stock market soared on Wednesday afternoon when the Federal Reserve announced it would not begin "tapering" its bond-buying program, which has been aimed at stimulating the slowly-recovering economy. And that's likely a sign that the Fed is still quite worried about the health of the economy.
In May, Fed chair Ben Bernanke implied that the Fed would soon begin to cut back its Treasury bond-buying program — about $85 billion a month — by about $10 billion a month. This tapering would reduce the risk of inflation. So investors were shocked on Wednesday when they learned the taper's arrival would be delayed. The surprise caused a "huge sugar rush," an analyst at Societe Generale told The Wall Street Journal's MoneyBeat blog. Here's what that sugar rush looks like in chart form:
Market is throwing a "no taper" party pic.twitter.com/tQRVqsUpBK— Anthony De Rosa (@AntDeRosa) September 18, 2013
Whoa now. "This is what it looks like when the entire market misreads the Fed," Quartz's Matt Phillips said. (The surprise merited the use of an exclamation point headline: "No Taper!") The Dow Jones and S&P 500 both hit all-time highs and were still climbing hours after the announcement.
Tapering is a confusing subject, but at its most basic, it would have slowed down — hence, tapered — the Quantitative Easing (QE) program put in place by the Fed to help the economy recover from the lingering effects of the financial crisis five years ago. (You can find some good explainers from Matt Yglesias at Slate, Matt O'Brien at The Atlantic, or Kevin Roose at New York.) Today's announcement means that those plans to stop the QE are delayed.
What does that mean? Quartz explains:
And the fact that the Fed was willing to hold off on the taper despite well entrenched expectations from the market suggests, to some, that the Fed is much more worried about the state of the economy than was previously thought.
John Maxfield at the stock research company Fool.com agreed with those worries, although he added that there were some positives:
For investors, the news should be interpreted as a double-edged sword. On the one hand, it's unquestionably a negative indication of the state of the economic recovery... On the other hand, however, virtually the entire financial industry will benefit from the — at least temporary — reversal of interest rates.
With this latest delay, it's not immediately clear when those temporary benefits to the financial industry will end and tapering will eventually begin, as The Wall Street Journal's David Wessel points out:
Bernanke: Fed could taper "possibly later this year" if economy performs as Fed projects, but that's an impt "if"— David Wessel (@davidmwessel) September 18, 2013
Bernanke's tenure as chairman of the Fed ends in January, and his successor has been the source of a major debate so far. Whoever it may be, that future successor already faces a big decision in the coming months. And next time, the markets will likely be more ready — whatever that decision may be.
This article is from the archive of our partner The Wire.
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