Blog : Stocks Buoyed by Continued Fed Stimulus

by Ed Zwirn on September 18th, 2013

The stock market was buoyed this afternoon by the news that the Federal Reserve will continue its $85 billion monthly bond buying stimulus program.

In an 11-to-one vote, the Fed governors voted to continue the quantitative easing program - through which the bank pumps money into the economy by buying $40 billion of mortgage-backed securities and $45 billion of longer-term Treasury debt each month - and to continue reinvesting the interest and principal payments the bank receives from these investments.

In addition, in a statement that largely duplicated the last FOMC statement, which was issued July 31, the Fed promised to keep the federal funds rate at or below 0.25% for as long as the unemployment rate remains above 6.5% (it is presently 7.3%) and inflation between one or two years ahead is projected at no more than 2.5% (the August CPI rose 0.1%, it was announced yesterday).

Not surprisingly, the market for everything from penny stocks to blue chips has reacted swiftly and positively to this news, with the Dow Jones Industrial Average up nearly 0.9% on the day, the NASDAQ up 0.8% and the penny stock-rich Russell 2000 up 0.7%.

In another bullish signal, the interest rate on the 10-year Treasury bond is down 3.2%, benefiting everything from stocks to home purchases. This can only help boost the appetite for risk on the part of investors hungry for yield while adding strength to the housing market (and all the industries that depend on it) as mortgages become cheaper.

Commenting on recent U.S. economic conditions, the Fed governors' statement said that the downside risks to the outlook for the economy and labor market have diminished over the past year, but warned that "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market."

The Fed also warned that the current low level of inflation could pose risks to the U.S. economy. "Inflation persistently below [the Fed's] 2% objective could pose risks to economic performance," the statement said, adding that the committee "anticipates that inflation will move back to its objective over the medium term."

Until then, the statement suggests, the Fed will continue to pump up the volume. With the DJIA at 15,652.14 as of this writing, the market for most stocks is standing at or near record highs, and is apparently poised to break through these records.