The Fed’s decision to not trim its $85 billion a month spending on bonds caught nearly everyone on Wall Street by surprise. Bernanke even seemed a bit flustered at the market’s nearly unanimous consensus on the Fed’s plans. So why did the Fed decide not to taper?
The main reason is that the economy isn’t recovering as fast as Bernanke would like. One indicator of that is the housing market which is growing.
“But it’s growth at lower rates of price increase then we’ve seen in recent quarters and years,” says Stuart A. Gabriel, Director of the Ziman Center for Real Estate at UCLA and Professor of Finance at UCLA Anderson School of Management.
Those projections are part of the data that Bernanke’s announcement referred to when he said asset purchases have always been “conditional on the data.” But there is more to the Fed’s decision than just numbers.
“This includes whether we are going to have a government shutdown or whether we are going to settle the national debt ceiling in a sensible way or congress will do something crazy,” says Alan Blinder, a former economic advisor to the Clinton White House.
The Fed would like to see resolution on the fiscal crisis before it makes any big decisions. Whether Congress is sensible or crazy should be evident in the upcoming debt ceiling debate at the end of the month.