QE vigilantes 1, The Fed 0

Surprise! Most, including myself, had expected the Fed to announce a tapering at today's meeting. My view - likely in the $10 billion range.

Instead, there was no change in policy.

My thoughts:

1. The Fed doesn't have much confidence in its economic outlook

2. The Fed is concerned about the back-up in interest rates and the possible effect on housing

3. There is some concern about fiscal restraint and the budget battles that loom.

Much of this comes directly from the Fed's statement.

Just to illustrate: 

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market (italics,underlined my emphasis and a new addition to the September statement vs the July statement).

"...but mortgage rates have risen further and fiscal policy is restraining economic growth."

Stocks surged, with the Dow and the S&P hitting a new record, but the focus will shift to the upcoming budget battles. Plus, will investors get that uneasy feeling since the Fed isn't seeing the kind of economic activity they had envisioned?

For now, the QE vigilantes that drove rates skyward seem to have forced the Fed to blink, and Bernanke is no longer so focused on a jobless rate that had given him the green light to taper.