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For all the Fedspeak foreshadowing action, the U.S. central bank gave markets a pleasant surprise on Wednesday. The Federal Open Market Committee stuck with $85-billion (U.S.) of bond purchases each month rather than reducing them as widely expected. The S&P 500 Index of stocks was up 1.2 per cent at a new record high by the 4 p.m. close following the 2 p.m. announcement, the 10-year Treasury bond yield slipped lower by 0.14 percentage point, and gold rose 4.2 per cent.
Staying pat, if only for the moment, is equivalent to Federal Reserve chairman Ben Bernanke increasing monetary stimulus. That’s because government borrowing and mortgage finance volumes have decreased since the Fed began this round of purchases a year ago.
At $168-billion a month, average Treasury bond issuance in the first eight months of this year was 16 per cent lower than in the same period a year ago, according to the Securities Industry and Financial Markets Association. The average monthly U.S. deficit – a better proxy for incremental government borrowing – is down to $58-billion this year, from $105-billion last. With the Fed still buying $45-billion of Treasuries a month, it is now mopping up a whopping 78 per cent of net issuance by this measure, against 43 per cent when its latest program began.
Housing agency bond issuance is down, while more agency mortgage-backed securities were sold through August this year than last. The combination is on par. Add back gross Treasury issuance and the monthly average across all three types of debt has been $359-billion this year, nearly 10 per cent less than last, while the Fed’s pace of buying has held steady.
Mr. Bernanke has suggested that the total debt held by the Fed is a more meaningful figure than the flow, but this stock is also increasing. At Sept. 12 the Fed’s balance sheet hit $3.7-trillion, up from $2.9-trillion a year ago.
The FOMC’s inaction comes despite recognition that the U.S. economy is improving – even if interest rates are also rising. The Fed’s statement expressly mentioned fiscal cuts, and the tapering delay could reflect concern about another looming Washington fight over the federal budget and borrowing. Even so, Mr. Bernanke seems to have had an attack of nerves over a policy shift he himself flagged earlier in the year.