by Jiang Hanlu, Liu Fan
NEW YORK, Sept. 18 (Xinhua) -- The decision of the U.S. Federal Reserve on Wednesday to keep its bond-buying program in place surprised Wall Street, but in the meantime boosted the Dow Jones Industrial Average and the S&P 500 to new historical highs in a double shock.
Traders and analysts believe the Fed's decision to delay tapering is positive for the equity market in the short term, but longer term a number of issues could weigh on stocks, with some traders expressing concern that a delay may create asset bubbles.
"NO TAPER" SURPRISES MARKET
The Federal Open Market Committee (FOMC), the Fed's policy-setting arm, said Wednesday in a statement following its two-day policy meeting that they noticed economic gains despite fiscal drag, but decided to await more evidence that the economic progress will be sustained before adjusting the pace of quantitative easing.
Major stock indices spiked on the news. The Dow soared 147.21 points, or 0.95 percent, to close at an all-time closing high of 15,676.94 points. The S&P 500 also finished at an all-time closing high of 1,725.52 points. The Nasdaq Composite Index rose 37.94 points to a 13-year high of 3,783.64 points.
J.P. Morgan Chief U.S. Economist Michael Feroli said in a note that "the Fed delivered a shocker today by leaving intact its 85 billion U.S. dollars monthly pace of asset purchases."
"I'm surprised they didn't pull back because I think the policies are having a diminishing impact on the real economy but I understand the reason they cite for not doing anything," Keith Bliss, senior vice president and director of sales and marketing at Cuttone & Company, told Xinhua. "Why not start to exit the market and let the market normalize and clear so that we can assess the true value of the market?"
Economists on the whole expected the Fed to announce a small tapering of its monetary stimulus at the meeting, ranging from 10 billion to 15 billion dollars, which they believe the market is able to digest.
The taper was widely anticipated as Federal Reserve Chairman Ben Bernanke has said on several occasions that the central bank may start to moderate the pace of asset purchases later this year. Therefore, some investors feel "angry" about the Fed's decision to delay the long-debated tapering, as they have covered their positions in anticipation of its likely implementation.
"NO TAPER" POSITIVE IN SHORT TERM
In the short term, delaying tapering is a bullish sign for the market, as investors will continue to benefit from the massive liquidity the Fed pumps in.
Each month, the Fed purchases 40 billion dollars of mortgage-backed securities and 45 billion dollars of longer-term treasury bonds in an attempt to stimulate the U.S. economy.
"In short term, it's good for the market because in a zero-interest rate environment, you have to put your money to work somehow. There is some good things going on within the U.S. equity market, you can make some money," Seaport Securities trader Jason Weisberg told Xinhua.
Bliss is also optimistic about the decision, and said: "Based upon current effect the price actions have on the marketplace, we should see the market trade to be higher than now."
WORRIES WEIGH IN LONG TERM
While the market cheered with the delay of tapering, economists and traders expressed concerns for the market long term, as along with the delay, the Fed also downgraded its outlook for the U.S. economy.
In the Summary of Economic Projections, released along with the statement, the Fed expects the U.S. real GDP growth for 2013 to be in the range of 2.0 percent to 2.3 percent, down from 2.3 percent to 2.6 percent in their June forecast. It also cut the 2014 economic growth projection to the range of 2.9 percent to 3.1 percent from 3.0 percent to 3.5 percent.
"We believe it simply appears that the Committee was more nervous about the resilience of the economy than they let on to in public statements," Feroli said. "Whereas over the last month or two, Fed officials mostly brushed off concerns about higher interest rates, today that issue loomed large in the FOMC's newfound skittishness about the health of the recovery."
Traders also noted that the upcoming fiscal debates in Washington, the third-quarter earnings season, as well as a wave of important economic data scheduled for October added volatility to the market.
Bliss also expressed concerns over emerging bubbles on the stock market, as he believes the market is "manipulated and distorted" at this point in time by the Fed's massive monetary stimulus, and some traditional metrics showed "the market is overvalued by a pretty wide margin."
However, Weisberg disagreed. "I'm not saying that we will not pull back, but there is no bubble that existed," he said.
Weisberg predicted that major stock indices will end up in a better place by the end of this year, with the S&P 500 at somewhere between 1,750 to 1,775 points and the Dow at around 16,000 points.