The news yesterday that the Federal Reserve will not reduce its $85 Billion/month bond-buying program makes my post yesterday on What Happens if The Fed Doesn’t Taper (which includes a primer on the bond buying program called Quantitative Easing) even more relevant. It also vindicates Economist Justin Wolfers who may have been the only one who believed the Fed wouldn’t taper. He called it on 9/13 after downward revisions of economic growth and jobs data and again before the announcement yesterday. He is great to follow on Twitter.
The decision to continue the QE at current levels, was a result of data that indicated the poor state of the economic recovery. To build on my metaphor from yesterday, the economy is not ready to function without its training wheels yet. The Fed lowered their estimate for 2013 GDP Growth to predict that GDP may improve 2% - 2.3% compared to the 2.3%-2.6% it predicted in June. It also lowered growth projection for 2014 to 3% down from almost 3.5%.
Just as was mentioned yesterday in What Happens if The Fed Doesn’t Taper, the stock market skyrocketed and the S&P 500 went up over 1%. Yesterday was a good day to be highly leveraged in the markets. Bad long-term projections led to big short term gains for investors yesterday. The Fed did however leave the door open that a taper could start at some point in October. QE won’t last forever so enjoy the ride while it does.