Wall Street’s knee-jerk reaction to the Federal Reserve choosing to keep the pedal to the monetary policy metal was loud and clear on Wednesday: Buy Buy Buy!
That initial exuberance, however, masks a nagging worry and no shortage of confusion about the Fed’s reluctance to act after the central bank had positioned markets for a reduction in its $85 billion per month bond-buying programme. It left many investors in a fog about what comes next.
The trading day certainly did not unfold as expected. The vast majority of investors were bracing for a modest reduction in the Fed’s monthly purchases of US Treasury debt and mortgage bonds. But citing concerns about low inflation, the impact of a recent rise in long-term interest rates on housing, and headwinds from Washington’s “fiscal retrenchment”, the Fed said it needed to see more economic improvement before acting.
The Fed’s refusal to start to bow out of the asset-buying game sent stocks soaring, with the benchmark US S&P 500 index closing at a record high. “The Fed is sending a message that the economy is weak, and that’s confusing,” said Wayne Kaufman, analyst, Rockwell Securities.