The Federal Reserve stunned markets and analysts on Wednesday, announcing it would not reduce its bond-buying program, citing economic growth that's more lackluster than expected. Stock, oil and gold prices spiked on the no-taper decision, while Treasury yields and the dollar plunged.
The central bank had been widely expected to scale back its monthly purchases of $85 billion, if only by a token $5 billion-$10 billion.
Treasury yields and mortgage rates had increased sharply since the last Fed policy meeting in May, jumps which appeared to affect housing activity.
Fed Chairman Ben Bernanke took pains to stress that market conditions did not play into decision-making. But traders' reaction to taper hints clearly weighed on policymakers, said Steve Blitz, chief economist at ITG.
"They saw the future and decided to back away, " Blitz said.
The Fed policy body, in its statement, noted still-high unemployment and market tightening. It also repeatedly cited the drag of reduced federal spending and fiscal policy uncertainty.
"In light of these uncertainties, the committee decided to await more evidence that the recovery's progress will be sustained before adjusting the pace of asset purchases," Bernanke said in prepared remarks.
Bernanke deflected multiple questions at Wednesday's press conference about market expectations for tapering to begin, saying at one point, "I don't recall stating that we would do any particular thing at this meeting.
The Fed did what it explicitly promised, said Gregory Miller, chief economist at SunTrust Banks. "There was never a time when he or anybody else said, 'Oh, it's September.'
While many economists have cited the falling labor participation rate's impact in lowering unemployment to 7.3%, Bernanke said participation is declining at least partly for reasons not related to the current economy.
The Fed's revised forecasts peg the jobless rate at 7.1%-7.3% by year-end and 6.4%-6.8% at the close of 2014.
But Bernanke admitted that previous forecasts had been overly optimistic.
The Fed has no choice but to err on the side of optimism, because propping up market confidence is key to its job, said Blitz.
'Oops' Not In Fed's DNA
"They have to back away gingerly" from previous comments that hinted tapering would begin in 2013, Blitz said. "It's not in the DNA of the Fed to say 'Oops, QE forever.'
The Fed once again committed to leaving interest rates low even after bond-buying ends. Rate hikes likely won't start until 2015. In fact, the central bank views rate policy as being more effective than the asset purchases, Bernanke told reporters.
Many economists share that view. Asset buys may have reached a point of diminishing returns, Miller said.
Some Fed watchers say exiting ultraeasy money policies will be even harder now.
The Fed is "creating problems by continuing QE and making the unwind that much more difficult to do," Blitz said. "This is not going to be easy. (Bernanke) doesn't want to deal with the endgame until he has to. The endgame is fraught with all kinds of issues: What if the economy goes back into recession? Where does he go?"