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NEW YORK (Reuters) - The U.S. Federal Reserve said on Wednesday that it would continue buying bonds at an $85 billion monthly pace for now, surprising financial markets that were braced for a reduction in the central bank's economic stimulus.
Citing strains in the economy from tight fiscal policy and higher mortgage rates, the Fed decided against the tapering of asset purchases that investors had all but priced into stock and bond markets.
KEN FISHER, CHAIRMAN AND CHIEF INVESTMENT OFFICER, FISHER INVESTMENTS, NEW YORK:
"I never liked quantitative easy, I believe that it's misunderstood by almost everyone. Flattening the yield curve is not stimulative, flattening the yield curve is anti-stimulative. That's provable. It's traditional, it's fundamental and I wish they would get on to ending quantitative easing as much as possible immediately, because it would stop giving people this nonsense to talk about.
"This one is another non-starter that won't go away until it goes away. Until it goes away, people will not realize that its going away is a good thing instead of a bad thing. "The steepness of the yield curve, regardless of its cause, all around the developing world is one of the 10 leading economic indicators. In fact, steepness is expansionary and flatness is contractionary, that has always been true. And the reason that it's true, is because the core business of banking is borrowing short and lending long. And a steeper yield curve makes banks more eager, on the margin, for the next subsequent loan."
MICHAEL SHELDON, CHIEF MARKET STRATEGIST, RDM FINANCIAL, WESTPORT, CONNECTICUT:
"This was the most dovish scenario that investors could imagine. Chairman Bernanke remains concerned that the economy faces headwinds and that it is not as strong as it should be to stand on its own.
"Foreign markets could be more of a beneficiary than the U.S. since they were hurt more by rising rates during the summer time.
"I think the Fed got what they wanted in a sense, in terms of bond yields coming down."
MARC DOSS, REGIONAL CHIEF INVESTMENT OFFICER, WELLS FARGO PRIVATE BANK, SAN DIEGO, CALIFORNIA:
"The Fed's decided to err on the side of caution, they are willing to risk inflation, willing to risk bubbles, because they are worried about the economy.
"This sets the tone across the globe. We were going to be the first to kind of take the foot off the accelerator here but seems were not ready yet. It will be interesting to see how Bernanke frames this in the press conference."
MICHAEL JONES, CHIEF INVESTMENT OFFICER OF RIVERFRONT INVESTMENT GROUP IN RICHMOND, VIRGINIA:
"The Fed has behaved exactly consistently with the guidance they gave in April and May, and that is incredibly bullish in our opinion."
ERIC STEIN, VICE PRESIDENT, PORTFOLIO MANAGER, CO-DIRECTOR OF GLOBAL INCOME, BOSTON:
"It's surprising that the Fed telegraphed tapering and didn't do it. That said, not a lot changed in the markets and economy to justify tapering but why did they seem to indicate that they would? The dollar sold off, Treasuries has rallied. It's a pretty dovish statement.
"They have pushed back when they expect the Fed funds rate to go up. They decided on no taper while offering dovish language and rate guidance. The Fed could be concerned that interest rates have gone up too far, too fast. Mortgage applications are down. Rates moved up sharply over a three-month period though they stabilized in the last month. ations are down.
"The challenge for the Fed has been to try to disconnect tapering from the path of the federal funds rate. I thought they would do 'taper lite' and have some dovish language to lean against the idea of interest rates going up too quickly."
SAM BULLARD, SENIOR ECONOMIST WITH WELLS FARGO SECURITIES IN CHARLOTTE, NORTH CAROLINA:
"We were in the $10 billion camp and they didn't make move. Going into the policy statement, it wasn't matter of whenever they will taper, it was how much. This was a surprise when they didn't do anything. The Fed coming into this had said any rate increase will be gradual. When you look at the target level, there is a couple of rate moves in 2015. The focus will be later in the December which will give Bernanke a chance to explain the tapering. By not doing it today, that ramp coming off QE will be a faster one. The reduction will be in larger intervals unless they change their language on QE. The notion of 'tapering lite' diminishes."
RONALD SIMPSON, MANAGING DIRECTOR OF GLOBAL CURRENCY ANALYSIS AT ACTION ECONOMICS IN TAMPA, FLORIDA:
"They surprised everybody. The dollar got crushed, stocks are up, and yields are down. Nobody was positioned for this, although I think the foreign exchange probably was leaning towards being short of dollars.
"We might see a reverse in equity markets. Some people might think that the lack of doing anything is kind of like a warning sign for the economy."
BONNIE BAHA, HEAD OF GLOBAL DEVELOPED CREDIT AT DOUBLELINE CAPITAL LP, LOS ANGELES:
"Fed decision making should be data dependent as opposed to forecast dependent. Weak numbers for employment and housing since Bernanke's original taper talk in the Spring surely figured into this decision. Add to that fact we have an inflation rate well below their 2 percent objective.
"Given the mediocre economic growth outlook, the Fed must surely recognize that once you begin a tapering program the credibility behind your decision-making is severely compromised if you are forced to reverse course. This was a move which signals that the Fed recognizes how difficult it would be to have to put the genie back into the bottle."
BUCKY HELLWIG, SENIOR VICE PRESIDENT, BB&T WEALTH MANAGEMENT, BIRMINGHAM, ALABAMA:
"Stocks went up on the news. Bonds went up ,too. But I think what it basically does is it puts the discussion off until October, and more likely December, as to when the taper will come. Initially the reaction is very favorable because the lower rates give a bid to bonds and make stocks look more attractive relative to bonds, so we saw both financial assets classes move higher in price.
This will be good news short term but the attention will focus back on the data."
FRANK HOLMES, CIO, U.S. GLOBAL INVESTORS, SAN ANTONIO, TEXAS:
"I think the data is quite compelling that the real estate market boom is very narrow and 50 percent of home buyers have been cash because of the bureaucracy and process to get a mortgage has been so difficult."
"Housing is one of the biggest multipliers for jobs, where $1 is worth about $16. So it is not your normal economic rebound until they streamline the process.
"We weren't surprised by the Fed staying put. Last week we were contacting mortgage brokers and it becomes very evident housing was coming to a halt. And with the recent spike in mortgage rates, housing has fallen. We saw the emerging markets selling off as well and created a global instability. It just shows how interconnected we are in the world.
"We think this economic upturn is very fragile, so we're not surprised at all by the Fed's decision."
"The economic growth of 2 percent over the past year has led to a decline in the unemployment rate only because labor force paricipation has weakened. The combination of very sluggish growth and an uncertain fiscal outlook all pointed to them not reducing stimulus. They made the correct economic decision not to tighten.
"The markets were pricing in some reduction in bond purchases but that will not happen now. There's a rally in bonds and in equities.
"The economy is still weaker than they would like. Inflation is still too low."
OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON. D.C.:
"The Federal Reserve shocked markets by making no changes to lending rates or to its $85 billion in monthly bond purchases. Investors had largely priced in a tapering of around $10 billion in monthly stimulus.
"The accompanying statement sounded a surprisingly dovish tone as well. The Fed cut its growth forecasts for 2013 and 2013 and 12 FOMC officials said they would prefer the first rate hike in 2015 versus the previous 2014 forecast.
"The surprisingly dovish result sent the dollar tumbling and stocks soaring. Investors await Fed Chairman Bernanke's press conference at 2:30pm ET for further clue."
"The FOMC's decision not to taper reflects the recent slowing in the economy, the lackluster employment gains, and the concerns over deflation.
"Monetary support for assets, especially dollar denominated commodities will continue.
"The recent price decline in gold and oil that was attributable to the removal of Federal Reserve asset purchases is going to be restored. The Fed wants more inflation, or even some inflation, not less."
WAYNE KAUFMAN, CHIEF MARKET ANALYST AT ROCKWELL SECURITIES IN NEW YORK:
"Everyone is a little shocked. I think it should have done a tiny taper to inoculate people to the idea. Now we're seeing big moves, with gold, hard assets, commodities all shooting up. The Fed is sending a message that the economy is weak, and that's confusing. I would've been happier if there had been a small taper to prepare the investing public to the idea. It seems like it has been shaken by the home sales, with rates shooting up. It seems like that has a lot of weight in the Fed's decision."
BRAD MCMILLAN, CHIEF INVESTMENT OFFICER FOR COMMONWEALTH FINANCIAL IN WALTHAM, MASS.:
"No taper, the market loves it, we will see if that lasts but boy, we are off to the races. From a short term stock market perspective it can be seen as a good thing because the market likes to see continued Fed stimulus. From a market perspective, people are going to say, 'Hey, great, the Fed is back in the game, they've still got our backs.'
"From a real economy standpoint what it says is the Fed is actually more nervous about the economy than is generally perceived. They wanted to see two things - inflation at a certain level and employment at a certain level. For a while there it looked like employment was indeed going to punch the button, but at the same time the most recent report was pretty weak. So maybe they see some more weakening that is not generally apparent out there. I also think the Fed is very concerned about is the potential for political dysfunction and to start withdrawing stimulus now might be to put a something back in the bag they may need in literally a couple of weeks."
DOUGLAS BORTHWICK, MANAGING DIRECTOR, CHAPDELAINE FOREIGN EXCHANGE, NEW YORK:
"The economy is stabilizing but it's not growing. The Fed has always said they were data-dependent and data would determine the timing of the taper. But the data that has come out over the past month hasn't been good.
:We have yet to see the U.S. economy move at a self-sustaining pace, a pace that would let the Fed take the crutches away. Crutches won't fix a broken leg but they do help you to walk, and right now, QE is still the economy's crutches. This is good for the stock market, for short dollar positions and for emerging markets."
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
"Obviously this was very surprising. There is no question that we were being set up for Fed tapering. The market did not come upon that conclusion on its own as this was suggested by many Fed speakers. When it comes down to it the Fed is getting what is wants right now as yields have sharply come down."
TODD SCHOENBERGER, MANAGING PARTNER AT LANDCOLT CAPITAL IN NEW YORK:
"This is hardly surprising considering the current macro environment. There's nothing that could justify the Fed doing any type of tapering. It looks like they will punt until December."
DAVID JOY, CHIEF MARKET STRATEGIST AT AMERIPRISE FINANCIAL IN BOSTON:
"This is a surprise, if only because of the overwhelming consensus was that we would see a taper. I've been thinking the Fed would wait until October but felt I was in the minority there. So as far as it being the consensus, this is a surprise, but in terms of the information we've seen, it isn't. The data has been fairly ambiguous, so this is a good move for the Fed.
"The initial reaction was positive, with people thinking, 'here we go, more liquidity in the market.' That's a good thing as far as being an ongoing tailwind. But the decision also means the economy isn't as strong as we'd like, which has implications for corporate earnings down the road. I don't think we'll settle up where we popped."
JOSEPH TREVISANI, CHIEF MARKET STRATEGIST, WORLDWIDEMARKETS, WOODCLIFF LAKE, NEW JERSEY:
"The Fed's unwillingness to begin to end the quantitative easing program, almost uniformly expected by the markets, will excite concerns as to the what governors see in the immediate future that they are willing to risk market dislocations to keep their economic support running.
"I am really shocked to tell you the truth. The dollar dropped 50 points on the news and will continue to weaken."
MARKET REACTION: U.S. short-term interest rate futures jumped after the Fed's announcement U.S. Treasuries yields fell. Benchmark 10-year notes were last up 23/32 in price to yield 2.76 percent, down from 2.86 percent before the statement. Five-year notes gained 18/32 in price to yield 1.49 percent, down from 1.63 percent before the statement. Thirty-year bonds gained 17/32 in price to yield 3.80 percent, down from 3.84 percent before the statement.
STOCKS: The S&P 500 index traded above 1,709.67 to hit record intraday high FOREX: The dollar fell sharoky, hitting a 7-month low versus the euro after the Fed's decision