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Fed message a boon for stocks, not for job seekers

First Published Sep 19 2013 02:45PM      Last Updated Sep 19 2013 02:49 pm

WASHINGTON • The Federal Reserve’s decision to maintain the size of its economic stimulus could be a gift for car and home buyers, for Americans with 401(k) accounts and perhaps for developing economies.

Yet for savers who rely on interest income, Wednesday’s announcement was a sour one. The Fed also sent an ominous message to job seekers: Hiring and economic growth remain sluggish and vulnerable to further weakening from budget fights in Washington.

The Fed surprised just about everyone by delaying a slowdown in its $85 billion in monthly bond purchases. The purchases are designed to keep long-term loan rates low to spur borrowing and spending. Fed officials had been signaling that they’d likely start reducing their purchases by year’s end if the economy steadily improved. That pullback was expected to start this week.



But on Wednesday, Fed officials made clear they aren’t yet satisfied with the economy’s progress.

"Conditions in the job market today are still far from what all of us would like to see," said Chairman Ben Bernanke.

Here’s how some individuals and groups could be affected by the Fed’s decision to delay a slowdown in its bond purchases:

— 401(k) and other stock investors:

Financial markets celebrated the Fed’s delay. The Dow Jones industrials surged more than 1 percent to a record high of 15,677 before retreating slightly Thursday.

It’s no wonder stock investors were ecstatic: The Fed’s bond purchases could hold down yields on long-term bonds. Low bond yields cause some investors to shift money into stocks in pursuit of higher returns. That money tends to boost stock prices.

Driving up stock prices is part of the Fed’s plan. That’s because as stock prices surge, Americans who own stocks feel wealthier and more willing to spend. This is important because consumer spending accounts for about 70 percent of U.S. economic output.

— Borrowers:

The Fed’s bond purchases benefit borrowers by pushing down long-term interest rates. The yield on the benchmark 10-year Treasury note dropped sharply after the Fed announcement. Rates on mortgages and many other consumer and business loans tend to parallel the 10-year Treasury’s yield.

"It helps people who are looking to buy a house in the near term," said Gus Faucher, senior economist at PNC Financial Services Group. "It makes housing more affordable. That’s one reason the Fed decided not to act — to make sure the recovery in the housing market continues."

Indeed, investors had driven up long-term U.S. mortgage rates by a full percentage point since May in anticipation that the Fed would reduce its bond purchases as soon as this month.

— Emerging markets:

The same expectations for a Fed pullback had caused turmoil in some emerging economies in Asia and South America.

Here’s why: When U.S. rates were super-low, investors had moved money into emerging markets in search of relatively higher returns. In recent months, though, the prospect that the Fed would slow its bond purchases and send U.S. rates up led investors to shift money out of emerging markets and into higher-yielding U.S. and other bonds. That shift drove down stock prices and currency values in the emerging markets.

"Global investors are going where they can get the highest return," PNC’s Faucher said.

 

 

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