Investors had anticipated a small cut in the Fed's $85 billion in monthly bond purchases, which are intended to keep long-term borrowing rates low to encourage spending. A pullback would have signaled that the Fed felt the economy had shown steady improvement.
Was the Fed right to hold off? Here's the case for slowing the purchases — and the case against it.
— THE CASE FOR SLOWING BOND PURCHASES
If not now, when? That's what many economists were asking.
By not reducing its purchases as most investors and economists had expected, the Fed has heightened uncertainty about its future actions.
Back in June, it had all seemed clear: Chairman Ben Bernanke said the Fed planned to slow its purchases by year's end as long as the economy improved. The Fed's policymaking board reaffirmed that time frame at its July meeting. Borrowing rates rose in expectation that a pullback was near, with most economists forecasting that it would start in September.
Now, it isn't even clear that any pullback will begin before next year. If the Fed thinks the economy hasn't improved enough yet, there's little reason to think its view will change soon. The Fed's own forecasts foresee scant improvement until 2014.
Markets soared Wednesday in response to the Fed's decision. By maintaining the pace of its bond buying, the Fed will aim to keep borrowing rates as low as possible. That's seen as a recipe for higher bond and stock prices.
But "we wonder whether the longer-lasting reaction will be increased volatility ... as the Fed's communications become even more confused," says Paul Ashworth, an economist at Capital Economics.
So what's changed since June?
Not much. Employers have added an average of 180,000 jobs a month this year, about the same as last year and in 2011. From April through June, the economy grew at a 2.5 percent annual rate, little changed from its 2.8 percent rate in the quarter when the Fed began its bond buying.
Growth and hiring remain modest by the standards of a robust economic recovery. But they've been pretty consistent for the past few years.
The Fed's efforts, meanwhile, are more appropriate for a recession or other economic emergency, some economists argue.
"The Fed has gone to great lengths to describe its (bond purchases) as extraordinary economic stimulus," says Mark Vitner, an economist at Wells Fargo Securities. "It's not something you use when the economy is just struggling."
The Fed's decision to delay also suggests it's dismissive of concerns that its policies might be inflating dangerous bubbles in assets like stocks or real estate in the United States or overseas. By keeping mortgage rates low, the Fed has sought to accelerate the housing recovery. It's also tried to drive up stock prices. Yet the longer it continues to do so, the greater the risk that it will go too far.
Vitner notes that home prices have jumped 12 percent in the past year even as the number of homeowners has declined. And stock indexes closed at record highs Wednesday. Home and stock prices may have risen too far too fast considering the state of the economy.
The Fed's policies may have made the housing recovery appear stronger than it is: Much of the increase in sales and prices has been fueled by investors. First-time home buyers, who typically play a vital role in driving housing recoveries, remain largely on the sidelines. They face tighter credit standards, which the Fed's policies haven't addressed.
The Fed's "massive intervention ... has distorted the price of many financial instruments," said Sun Wong Sohn, an economist at California State University, Channel Islands. "The sooner (the Fed) can allow market forces dictate the price, the better."
— Christopher S. Rugaber, AP Economics Writer
_____ THE CASE AGAINST SLOWING BOND BUYING
What's the hurry?
Many argue that the Fed had good reason to delay any reduction in its bond-buying program: The economy still needs the help. Economic growth and hiring remain weak. The unemployment rate remains high.
The Fed's bond purchases tend to push interest rates down, making it cheaper for consumers to buy cars and houses. Lower rates also help drive the stock market up and make Americans feel wealthier and more willing to spend. That's important in a country where consumer spending accounts for 70 percent of economic activity.
The Fed downgraded its outlook for U.S. economic growth this year and next. The job market doesn't look as strong as in the spring when the Fed raised the prospect of scaling back the bond purchases. Job growth has slowed to an average of 155,000 a month since April, down from an average 205,000 in the first four months of the year.
True, the unemployment rate has sunk to a 4½-year low of 7.3 percent. But it's fallen for the wrong reason. More people have stopped working or looking for work. Once people without a job stop looking for one, they're no longer counted as unemployed.
Their departure shrank the so-called labor force participation rate — the percentage of adults who have jobs or are seeking one — to 63.2 percent, the lowest since August 1978. If those who left the labor force last month had still been looking for work, the unemployment rate would have risen to 7.5 percent in August.
Diane Swonk, chief economist at Mesirow Financial, noted that the Fed wants to see unemployment decline "because employment improves, not because the number of people looking for work falls."
The Fed has plenty of other reasons to delay any reduction in the bond purchases.
For one thing, inflation is under control. Those who want to see the Fed reduce its economic stimulus worry that super-low rates and aggressive bond purchases could ignite inflation and perhaps create dangerous asset bubbles.
But there's no inflation threat in sight. Inflation is running well below the Fed's 2 percent target. Consumer prices have risen just 1.5 percent over the past year. And there's little sign that that inflation is gaining any momentum. The Fed predicted Wednesday that inflation would stay at or below 2 percent through 2016.
A destructive budget fight also looms in Washington. Unless Congress agrees to fund the government past Oct. 1, the government will shut down. Worse, the government will reach its borrowing limit next month. If Congress won't raise the limit, the government won't be able to pay all its bills. The risk of a shutdown or default would likely rattle financial markets and could scare businesses and consumers into spending less.
The Fed doesn't want to reduce economic aid until it's sure the politicians don't wreck the economy. The upcoming budget battles "gave them the reason to hold off on tapering right now," says Greg McBride, senior financial analyst at Bankrate.com
Investors are also nervous about any reduction in Fed stimulus, despite Bernanke's assurances that even reduced bond purchases would still pump significant cash into the economy and financial markets.
Investors dumped bonds and drove up interest rates after the Fed started talking in May about cutting bond purchases. Since then, long-term mortgage rates have risen a full percentage point to the highest level in two years. Those rates could rise further if the Fed slowed its bond purchases.
David Robin, an interest rate strategist at Newedge LLC, said Fed policymakers were surprised by how quickly interest rates rose. They worried that rates would rise even more, and jeopardize economic growth, if they actually reduced the bond-buying.
"The Fed knows once they started to move," the market reaction "would be almost impossible to control," Robin said.
— Paul Wiseman, AP Economics Writer
_____ Follow Paul Wiseman on Twitter at https://Twitter.com/PaulWisemanAP . Follow Chris Rugaber at https://Twitter.com/ChrisRugaber .
WASHINGTON (AP) — Republican Sen. John McCain is accusing Russian President Vladimir Putin of corruption, repression and self-serving rule in an opinion piece for Pravda that answers the Russian leader's broadside published last week in an American newspaper.
In an op-ed headlined "Russians Deserve Better That Putin," McCain singles out Putin and his associates for punishing dissent, specifically the death in prison of Russian lawyer Sergei Magnitsky. The Russian presidential human rights council found in 2011 that Magnitsky, who had accused Russian officials of colluding with organized criminals, had been beaten and denied medical treatment.
McCain also criticized Putin for siding with Syrian President Bashar Assad in the 2½ year civil war that has killed more than 100,000 people.
McCain insists that he is not anti-Russian but rather "more pro-Russian than the regime that misrules you today."
"President Putin doesn't believe ... in you. He doesn't believe that human nature at liberty can rise above its weaknesses and build just, peaceful, prosperous societies. Or, at least, he doesn't believe Russians can. So he rules by using those weaknesses, by corruption, repression and violence. He rules for himself, not you," McCain wrote.
The senator submitted the editorial to Pravda and was told it would be posted on Thursday. The Associated Press obtained a copy of the editorial.
McCain assailed Putin and his associates for writing laws that codify bigotry, specifically legislation on sexual orientation. A new Russian law imposes fines and up to 15 days in prison for people accused of spreading "propaganda of nontraditional sexual relations" to minors.
On Syria, McCain said Putin is siding with a tyrant.
"He is not enhancing Russia's global reputation. He is destroying it. He has made her a friend to tyrants and an enemy to the oppressed, and untrusted by nations that seek to build a safer, more peaceful and prosperous world," the Arizona senator said.
McCain also criticized the imprisonment of the punk rock band Pussy Riot. The three women were convicted of hooliganism after staging an anti-Putin protest inside a Russian Orthodox Church.
The article by McCain, the 2008 Republican presidential nominee, comes just days after the U.S. and Russian officials reached an ambitious agreement that calls for an inventory of Syria's chemical weapons program within a week, and its complete eradication by mid-2014. Diplomatic wrangling continues, however.
Last week, Putin blamed opposition forces for the latest deadly chemical weapons attack in Syria and argued President Barack Obama's remarks about America were self-serving in an opinion piece for The New York Times. Putin also said it was dangerous for America to think of itself as exceptional, a reference to a comment Obama made.
McCain was not the first U.S. lawmaker to respond to Putin. House Armed Services Committee Chairman Howard "Buck" McKeon, R-Calif., wrote in an editorial for the Moscow Times about the suppression of the Russian people and the disregard for basic human rights.
The account, contained in an Aug. 7 report from Newport, R.I., police, adds to the picture that has emerged of an agitated and erratic figure whose behavior and mental state had repeatedly come to authorities' attention but didn't seem to affect his security clearance.
Alexis, a 34-year-old information technology employee at a defense-related computer company, used a valid pass Monday to get into the Navy Yard and then killed 12 people before he was slain by police in a shootout that lasted more than a half-hour.
A day after the assault, the motive was still a mystery. U.S. law enforcement officials told The Associated Press that investigators had found no manifesto or other writings suggesting a political or religious motivation.
Alexis, a former Navy reservist, had been undergoing mental health treatment from the Department of Veterans Affairs since August but was not stripped of his security clearance, according to the law enforcement officials, who spoke on condition of anonymity because the criminal investigation was still going on.
He had been suffering from a host of serious mental problems, including paranoia and a sleep disorder, and had been hearing voices in his head, the officials said.
The assault is raising more questions about the adequacy of the background checks done on contract employees who hold security clearances — an issue that came up recently with National Security Agency leaker Edward Snowden.
Navy Secretary Ray Mabus ordered two security reviews Tuesday of how well the Navy protects its bases and how accurately it screens its workers.
Similarly, President Barack Obama has ordered the White House budget office to examine security standards for government contractors and employees across federal agencies.
Mert Miller, associate director of Federal Investigative Services for the Office of Personnel Management, said in a statement that federal budget, personnel and intelligence officials were working to "review the oversight, nature and implementation of security and suitability standards for federal employees and contractors."
In general, he said, background security clearance investigations cover information about an individual's criminal history.
In addition, the House and Senate Veterans' Affairs Committees asked the VA for details about any treatment provided to Alexis.
At the U.S. Navy Memorial, in church and on the baseball field, the nation's capital paused to mourn the victims on Tuesday. Defense Secretary Chuck Hagel laid a wreath at the memorial's "Lone Sailor" statue as taps played.
Just a few blocks from the Navy Yard, the Washington Nationals were back to playing baseball after their Monday night game with the Atlanta Braves was postponed because of the shooting. The Nationals wore blue and gold Navy caps during warm-ups, and a moment of silence was held before the first pitch.
Those killed included: Michael Arnold, 59, a Navy veteran and avid pilot who was building a light airplane at home; Sylvia Frasier, 53, who worked in computer security; Frank Kohler, 50, a former Rotary Club president in Lexington Park, Md., who proudly reigned as "King Oyster" at the annual seafood festival; and marine engineer and naval architect Vishnu Pandit, 61, an Indian immigrant.
In the Newport, R.I., incident, Alexis told police he got into an argument with someone as he was getting on a flight from Virginia to Rhode Island, where he was working as a naval contractor, and he said the person sent three people to follow and harass him.
He said he heard voices talking to him through a wall while at one hotel, so he changed hotels twice, but the voices followed him, according to the report. He said he feared they might harm him.
He also "stated that the individuals are using 'some sort of microwave machine' to send vibrations through the ceiling, penetrating his body so he cannot fall asleep."
Later that day, Newport police alerted the Rhode Island naval station and sent a copy of the police report, Newport police Lt. William Fitzgerald said Tuesday.
A spokeswoman for the station had no comment Tuesday.
Alexis came to the Washington area about two weeks later and had been staying at hotels. On Saturday, two days before the attack, he went to a Virginia gun store about 15 miles from the Navy Yard.
He rented a rifle, bought bullets and took target practice at Sharpshooters Small Arms Range, the store's attorney Michael Slocum said. Alexis then bought a shotgun and 24 shells, according to Slocum.
The FBI said during Monday's attack Alexis was armed with a shotgun. Officials said he also took a handgun from a law officer.
A recording of an emergency transmission released Tuesday captures the tense moments after the shooting. A firefighter tells a dispatcher as sirens wail in the background, "We have active shooter on the fourth floor. I'll get you update on the building location, with several victims down. At this time I've requested the mass casualty bus."
In addition to those killed at the Navy Yard attack, eight people were hurt, including three who were shot and wounded, authorities said. Those three were a police officer and two female civilians. They were all expected to survive.
Alexis had run-ins with the law in 2004 and 2010 in Texas and Seattle after he was accused of firing a gun in anger. He was not prosecuted in either case.
And his bouts of insubordination, disorderly conduct and being absent from work without authorization prompted the Navy to grant him an early — but honorable — discharge in 2011 after nearly four years as a full-time reservist, authorities said.
"He wasn't a stellar sailor," Navy spokesman Rear Adm. John Kirby told CNN. "We know that."
But he said the offenses weren't "grievously serious" and the punishments for them are fairly mild. Kirby said there was a proposal to "administratively separate him from the Navy," with less than an honorable discharge, but Alexis volunteered to leave early and received an honorable discharge.
"Looking at his offenses while he was in the Navy, that the offenses while he was in uniform, uh, none of those give you an indication that he was capable of this sort of brutal, vicious violence," Kirby said.
As for Alexis' security clearance, Kirby said he received one around the time he enlisted. "It was good for 10 years. And it was at the secret level. So the security clearance was valid when he left the Navy in 2011. And because he wasn't out of work very long before he took this next job, the security clearance went with him."
Alexis joined the Florida-based IT consulting firm The Experts in September 2012, leaving a few months later to return to school. He came back in June to do part-time work at the Washington Navy Yard as a subcontractor, helping the military update computer systems.
The Experts' CEO, Thomas Hoshko, said that Alexis had "no personal issues," and he confirmed that Alexis had been granted a "secret" clearance by the Defense Security Service five years ago.
Alexis' clearance — lower than "top secret" — doesn't need to be renewed for 10 years. Still, the company said it hired outside vendors twice to check Alexis' criminal history.
Said Hoshko: Alexis' background check "came back clear."
Associated Press writers Pauline Jelinek, Matt Apuzzo, Adam Goldman, Jesse Holland, Stacy A. Anderson, Brian Witte and Ben Nuckols in Washington contributed to this report.