How Fed's latest message affects almost everyone

Fed decision to retain size of stimulus holds good news for buyers, bad news for savers.
By PAUL WISEMAN Modified: September 19, 2013 at 10:39 pm •  Published: September 20, 2013
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— The Federal Reserve's decision to maintain the size of its economic stimulus could be a gift for car and homebuyers, for Americans with 401(k) accounts and perhaps for developing economies.

Yet for savers who rely on interest income, Wednesday's announcement was a sour one. The Fed also sent an ominous message to job seekers: Hiring and economic growth remain sluggish and vulnerable to further weakening from budget fights in Washington.

The Fed surprised just about everyone by delaying a slowdown in its $85 billion in monthly bond purchases, which are designed to keep long-term loan rates low to spur borrowing and spending. Fed officials had been signaling since spring that they would likely start reducing their purchases by year's end if the economy steadily improved. Many economists and Wall Street banks had expected that pullback to start this week.

But on Wednesday, Fed officials made clear they aren't yet satisfied with the economy's progress.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben Bernanke said.

Here's how some individuals and groups could be affected:

RETIREMENT AND OTHER STOCK INVESTORS:

Financial markets celebrated the Fed's delay. The Dow Jones industrials surged more than 1 percent to a record high of 15,677 before retreating slightly Thursday.

It's no wonder investors were ecstatic: The Fed's bond purchases could hold down yields on long-term bonds. Low bond yields cause some investors to shift money into stocks in pursuit of higher returns.

As stock prices surge, Americans who own stocks feel wealthier and more willing to spend. Consumer spending accounts for about 70 percent of U.S. economic output.

BORROWERS:

The Fed's bond purchases benefit borrowers by pushing down long-term interest rates. The yield on the benchmark 10-year Treasury note dropped sharply after the Fed announcement. Rates on mortgages and many other consumer and business loans tend to parallel the 10-year Treasury's yield.

“It helps people who are looking to buy a house in the near term,” said Gus Faucher, senior economist at PNC Financial Services Group. “It makes housing more affordable.”

EMERGING MARKETS:

The same expectations for a Fed pullback had caused turmoil in some emerging economies in Asia and South America.

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