The long awaited Fed meeting finally arrived, and Fed officials surprised investors. The Fed decided not to begin to taper its bond purchases. After the news, mortgage rates swiftly improved and ended the week lower.
While the vast majority of investors expected a small cut in the quantity of monthly Fed bond purchases, the Fed made no change. According to the statement, Fed officials will wait for signs of stronger economic growth before scaling back its bond purchases. Fed Chief Bernanke stated that with “unemployment still elevated” and inflation running below its target, continued highly accommodative monetary policy remains appropriate. Both stocks and bonds rallied after the release of the statement.
One of the likely reasons that Fed officials decided to maintain the level of bond purchases was concern about the impact of higher mortgage rates on the housing market. Housing has been an important source of strength for the economy this year, but there are recent signs that the pace of improvement may be stalling. The data released over the past week showed the housing market holding steady. August New Home Sales increased slightly from July, although single-family units posted much stronger results than multi-family units. The September NAHB Home Builders confidence index remained unchanged from August, which was at its highest level since 2005.
The Existing and New Home Sales reports will be closely watched for hints about the strength of the housing market. The Durable Orders report will provide another reading on the economy. In addition, the German elections on September 22 could have an impact on global financial markets. The outcome will determine Germany’s stance on critical EU issues such as austerity measures, banking system reform and bailouts, which will influence the pace of economic growth for the EU.