FOMC Meeting: Fed Just Backtracked on QE Taper Talk

The Federal Open Market Committee (FOMC) meeting ended today (Wednesday) with word that the Fed plans to the stay the course on QE for now, backtracking from earlier hints it might begin tapering this fall.

"For all those looking for clear guidance on when quantitative easing will end, well, you will have to wait a little longer," Joel Naroff, president and chief economist at Naroff Economic Advisors Inc., wrote in a research note. "Indeed, there may have been some walking backwards today."

Money Morning Capital Wave Strategist Shah Gilani said it's no surprise the Fed has backed away from talk of tapering.

"There's no way the Fed, after ratcheting up the stock market and subduing bond yields in a massive momentum-upon-momentum loading up on bonds, is going to allow that trajectory to reverse itself," Gilani said. "The first statement about tapering was nothing more than a trial balloon. They wanted to change the discourse in the market and see if it reacted to nothing more than taper talk. They got a shock to the system. They weren't happy about that. That's because they aren't that tuned in to how fragile a situation they've created," he said.

EDITOR'S NOTE: Bernanke's printing presses are still running... for now. But we figure you've only got a few months before he pulls the plug for good, and the market's go on a death spiral. Money Morning's top experts put together a "safety plan" you can use to protect your wealth right away.

FOMC Meeting: The Fed is "Winging It"

Notably, after the two-day FOMC meeting, the committee said in its statement that economic activity had expanded at a "modest pace" in the first half of the year, in contrast to its more positive June assessment of "moderate" growth.

"They walked back the taper talk because it infringed on their momentum play. Now, they're saying they are not done with the Full Monty buying show since they only see modest, not moderate growth in the economy," Gilani said.

The Federal Reserve's policy-making committee noted unemployment has dipped, but remains elevated, and that longer-term inflation expectations have remained stable.

Financial consultant Bert Ely says it's clear the committee doesn't know what to expect with inflation or unemployment.

"They don't know how all this is going to play out so they're just kind of winging it," Ely said. "They seemed to have backed away from the tapering a little bit and reinforced their goals in terms of the unemployment rate and the inflation rate but ... they're making it up as they go along and it's unrealistic to expect that they would do otherwise."

Ely said he wouldn't be surprised if the Fed changed targets, perhaps, for instance, by considering labor market participation instead of only the unemployment rate because so many people have given up looking for jobs.

So When Will the Fed Taper?

This month's FOMC meeting marked the last before September, when some observers had predicted the Fed would begin tapering its $85 billion a month in bond purchases.

The FOMC did leave open the possibility of beginning tapering later this year or next year, saying, "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

And in typical Fed-speak, the statement today said, "The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate [maximum employment and price stability]."

It looks increasingly like September is too soon for the FOMC to agree on more taper talk, with Esther George, the president of the Kansas City, MO, Federal Reserve Bank, being the lone member who is voicing concern over the extended period of easy money policy.

Fed Chairman Ben Bernanke and the other 10 FOMC members voted to approve the statement, while George voted against it.

The statement said George "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."

Other notes from the FOMC meeting: The committee did note mortgage rates had increased, which could threaten the housing recovery, and said it would keep the target range for the federal funds rate at 0% to 0.25% for now.

On news of the statement after the FOMC meeting, prices for U.S. Treasuries reversed earlier losses to trade higher Wednesday while stocks closed mixed.

Today's FOMC announcement was welcomed by gold bugs. But the best news for gold prices is that the Fed's plan to hold off on tapering is just one of five drivers that could send gold to $2,500. To see the other four catalysts, and how high gold could spike this fall, check out this new gold investing report.

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"Fed" up with Bernanke as leader of the Federal Reserve? How do you feel about this next possible chief?: Obama Tells Money Morning Why He Just Loves Larry Summers...

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• The Federal Reserve:
  Transcript of FOMC Statement