WASHINGTON — The Federal Reserve’s surprise decision Wednesday to maintain a controversial bond-buying program keeping interest rates low to prop up the U.S. economy sparked a Wall Street rally. It also served notice that partisan politics and rising mortgage rates threaten an anemic recovery.
Wall Street had expected the Fed to signal its confidence in the economy and begin tapering off its purchases of $85 billion a month in government and mortgage bonds, which has helped keep interest rates at record lows.
Instead, the rate-setting Federal Open Market Committee said it decided to “await more evidence that progress will be sustained before adjusting the pace of its purchases.”
The committee also released an updated economic forecast, downgrading its views on economic growth prospects for the rest of this year and 2014.
The surprise was welcomed on Wall Street, where investors tend to buy more stocks when they can’t make any money off low interest rates. The Dow Jones industrial average jumped 147.21 points, or 1 percent, to 15,676.94. The S&P 500 surged 20.76 points, or 1.2 percent, to 1,725.52, slicing through its previous all-time high of 1,709.67 set Aug. 2. The Nasdaq composite rose 37.94 points, or 1 percent, to 3,783.64.
For Americans with 401(k) investment plans, the action likely will boost the value of their portfolios. But the reasons for the Fed decision to keep buying bonds carry worrisome implications for ordinary Americans, too. Fed Chairman Ben Bernanke pointed to a sharp rise in the lending rate for mortgages, caused by fears that the bond buying would end.
“We are somewhat concerned; I won’t overstate it,” he said, noting concerns that the climbing mortgage rates just as the housing market recovers “would be exacerbated if conditions tightened further.”
Bernanke returned several times to the theme of mortgage rates as one reason why the Fed decided to hold off on beginning to wind down a program that critics charge is distorting financial markets the world over.