by Yang Qi, Qiao Jihong
NEW YORK, Dec. 12 (Xinhua) -- Wall Street stayed calm on Wednesday despite a decision by the Federal Reserve to continue its asset-buying program and extend Operation Twist as concerns over the so-called "fiscal cliff" mounted.
After a two-day policy meeting, the Federal Open Market Committee (FOMC) announced it would continue purchasing agency mortgage-backed securities at a pace of 40 billion dollars per month.
The decision, considered an extension of the third round of the quantitative easing (QE3) program launched in September, sent major indexes to new highs by midday.
The FOMC said it would extend its Operation Twist, which is designed to lower lending costs by selling short-term Treasuries and buying long-term debt, when it expires at the end of the year, at a pace of 45 billion dollars per month.
Moreover, the FOMC would also keep the ultra low federal rate, saying it would be appropriate as long as the unemployment rate remains above 6.5 percent and inflation is projected to be no more than 2.5 percent "between one and two years ahead."
Although the Fed's decisions were mainly in line with market expectations, a total of 85 billion dollars of balance sheet expansion per month still encouraged stocks to gain in midday trading.
"Officials unexpectedly changed from calendar-based to outcome-based guidance on the funds rate at this meeting," said Jim O'Sullivan, the chief U.S. economist at High Frequency Economics.
Instead of the previous "at least through mid-2015" target, the FOMC now set specific thresholds for the measures, O'Sullivan said, adding that over time the effects of asset-buying would be significant.
However, stocks pared their early gains as market concerns over the fiscal cliff outweighed the stimulus effect of the Fed's announcement.
The three major indexes ended almost flat, with the Dow Jones index falling 0.02 percent to 13,245.45, the Standard & Poor's 500 down 0.04 percent to 1,428.48, the Nasdaq down 0.28 percent to 3,013.81. Rises in commodities prices, including crude oil and gold, also narrowed later in the day.
The U.S. economy is already being hurt by the fiscal cliff standoff in Washington, Federal Reserve Chairman Ben Bernanke said after Wednesday's meeting.
"We cannot offset the full impact of the fiscal cliff. It's just too big," Bernanke said. "I'm hoping that Congress will do the right thing on the fiscal cliff."
Republicans and Democrats remain deeply divided on tax policies and medical care spending. President Barack Obama lowered his demand for tax increases in the budget to 1.4 trillion dollars from 1.6 trillion dollars on Tuesday, but House Speaker John Boehner said that proposal can't pass the House or the Senate.
The market is expecting a deal in the "fiscal cliff" talks and the more Washington drags its feet on the issue, the worse it will be for the market, said Stephen A. Schwarzman, chairman and CEO of the Blackstone Group.
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