ROBERT SIEGEL, HOST:
The stock market hit new highs today after the Federal Reserve made a surprise announcement. Investors and economists had expected the Fed to start winding down it's $85 billion a month stimulus program at its policymaking meeting today, but it didn't. As NPR's John Ydstie reports, the Fed said it wanted to make sure a recent improvement in the economy and labor market continued before pulling back its stimulus.
JOHN YDSTIE, BYLINE: Federal Reserve policymakers have sent strong signals over the past few months that they would start winding down their bond-buying stimulus program before the end of the year. Surveys showed that a majority of economists and market participants believed it would happen today. But in the end, the Fed got cold feet as jobs reports weakened in the past couple of months and other data showed a mixed economic picture.
During a news conference following today's meeting, Fed chairman Ben Bernanke denied misleading the markets.
BEN BERNANKE: Well, I don't recall stating that we would do any particular thing at this meeting. What we are going to do is the right thing for the economy.
YDSTIE: Bernanke said that Fed policymakers decided to continue their stimulus unchanged because economic data on jobs, growth and inflation did not meet the Fed's projections for improvement.
BERNANKE: We try our best to communicate to markets. We'll continue to do that. But we can't let market expectations dictate our policy actions. Our policy actions have to be determined by our best assessment of what's needed for the economy.
YDSTIE: One thing that's clearly concerned to Fed is the sharp rise in long-term interest rates, including mortgage rates, since late spring and early summer when the Fed began the conversation about pulling back its stimulus. In their statement, Fed policymakers said if that financial tightening is sustained, it could slow the pace of improvement in the economy.
Today, long-term interest rates fell sharply on the news that the stimulus would remain in place, something policymakers, no doubt, hoped might happen. Bernanke also defended the usefulness of the stimulus, which some economists argue hasn't been affective in boosting growth in jobs.
BERNANKE: Labor market indicators, while still not where we'd like them to be, are much better today than they were when we began this latest program a year ago. And that happened notwithstanding a set of fiscal policies, which the CBO said would cost between one and one and a half percentage points of real growth and hundreds of thousands of jobs.
YDSTIE: Another factor that affected the Fed's decision to stay the course, according to Chairman Bernanke, was concern about a government shutdown later this month and Congress' fight over raising the debt ceiling.
BERNANKE: The Federal Reserve's policy is to do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely. So this is one of the risks that we are looking at as we think about policy.
YDSTIE: But Bernanke said there's little the Fed could do to absorb the shock of a failure to raise the debt ceiling, which could lead to a default on U.S. government bonds for the first time ever.
BERNANKE: And I think it's extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills and that we avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse effect on confidence and on the economy.
YDSTIE: In 2011, some Republicans in Congress suggested they were ready to default on the debt if the Obama administration didn't agree to more budget cuts. They pushed the debt ceiling fight to the last minute. That debacle led to a downgrade in the nation's credit rating.
While interest rates fell sharply today after the Fed announced it was continuing its stimulus unchanged, stock markets soared. Both the Dow Jones Industrials and the S&P 500 hit new record highs. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
