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S&P 500 breaks new record as Fed refrains from QE reduction

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S&P 500 breaks new record as Fed refrains from QE reduction

The Standard & Poor’s 500 advanced more than 1.2 percent following the Federal Reserve’s decision not to reduce the $85 billion pace of monthly asset purchases. The decision was announced prior to the market’s close, as the Federal Open Market Committee wrapped up its two-day policy meetings.

Federal Reserve Chairman Ben Bernanke told the markets stimulus cuts were tied to economic data, not time, and that record accommodation was still needed to ensure downside risks won’t resurface. The FOMC meets just twice more this year to decide the fate of quantitative easing, which has swelled the Fed’s balance sheet to more than $3.6 trillion since 2009. It is widely believed Ben Bernanke will be replaced once his second term ends on January 31, 2014.

The Fed’s decision to keep its monthly pledge at $85 billion surprised Wall Street, which was expecting a taper to the tune of $10 billion, according to a recent survey of 34 economists by Bloomberg News. The majority of Fed policymakers believe the first interest rate hikes will occur in 2015, which means the benchmark lending rate will remain at record lows until unemployment reaches 6.5 percent.

US stocks soared in intraday trade, after opening the day on the defensive in anticipation of the Fed’s decision. The Standard and Poor’s 500 leapfrogged its previous record high by more than 15 points to close at 1,725.52. The Dow Jones Industrial Average advanced 147 points to 15,676.90. The NASDAQ Composite rose more than 1 percent to 3,783.64, extending its 13-year high.

Fed officials forecaste US GDP to increase 2.3 percent this year, as much as 3.1 percent in 2014, and as much as 3.5 percent in 2015, suggesting the US economy is on a fast-track toward recovery. However, a failure to begin the tapering process in September could delay the mid-2014 timetable for a complete rollback of federal stimulus. Employment data over the next several months could determine if tapering plans will come to fruition this calendar year.

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