The Federal Reserve kept the punch bowl spiked a little longer in a surprise decision that postponed investors' day of reckoning with reality.
On Wednesday, the Federal Open Market Committee voted to maintain its $85-billion monthly bond buying program, defying expectations of two-thirds of economists polled by The Wall Street Journal, who were looking for the central bank to begin tapering its extraordinary bond purchases at this month's meeting.
The reason? The FOMC just hasn't seen the kind of economic growth many gurus and pundits have. “The Committee sees…growing underlying strength in the broader economy,” its statement said. “However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
“With unemployment still elevated and inflation projected to run below the Committee's longer-run objective, the Committee is continuing its highly accommodative policies,” Fed chairman Ben Bernanke said at a subsequent news conference.
"I don't recall stating that we would do any particular thing at this meeting," he added in response to a reporter's question.
The Dow Jones Industrial Average and the Standard & Poor's 500 Index immediately spiked to all-time highs as Investors gobbled up stocks right after the news broke.
They were apparently stunned that, what one money manager called “hands down the single most clearly telegraphed move in the history of monetary policy,” would have to await another day.
Apparently, so will the return to a more normal monetary policy, even one with extra low interest rates but without the crutch of $1 trillion a year in additional bond buying.
That could keep stocks rallying off sheer animal spirits and the adrenaline of Fed purchases. And the market already has effectively cleared two of the five hurdles I said it would face this fall.
The threat of U.S. military action in Syria is off the table, because of the collapse of President Obama's efforts to persuade Congress to authorize the use of force and the subsequent offer by Russia to turn its ally Syria's chemicals over for inspection and destruction.
Whether you believe this deal or not, the market sure does: Crude oil prices have fallen 6% since they peaked in late August, while gold prices have dropped 7.5% over the same period, before Wednesday's rally.
Stocks have been further buoyed by Sunday's news that former Treasury Secretary Larry Summers had withdrawn his name from consideration as Bernanke's replacement.
That made Fed vice-chair Janet Yellen the odds-on favorite, even though President Obama doesn't seem to like her very much. But Wall Street does for her long experience, track record of building consensus, and especially her reputation as a dove on monetary policy, which means she might take her time tapering. Perhaps she's exerting her influence already.