Testifying on Capitol Hill Tuesday, Fed Chairman Ben Bernanke conceded the obvious: "Economic activity appears to have decelerated somewhat during the first half of this year."
"Risks to economic growth have increased," he said, citing Europe's debt crisis and the U.S. "fiscal cliff" as big concerns.
Predictably, the Fed Chairman reiterated the Fed's pledge to "take further action as appropriate to promote a stronger economic recovery."
But Bernanke did not give any additional specifics about the timing of additional policy easing, prompting a midday sell-off in stocks. (The Dow fell about 155 points from its morning high near 12,800 but was back in positive territory in recent trading.)
"The market was hoping he'd a least hint, if not show some sort of commitment to changing from an extension of Operation Twist to outright quantitative easing in the near term," says Michael Pond, managing director and co-head of U.S. rates strategy at Barclays Capital.
"He certainly left the door open...but didn't indicate they were likely to do more in the near-term. That's what the market was a little disappointed with."
If this sounds familiar, it's pretty much the same thing that occurred after the Fed's FOMC meeting in June and the release of the minutes from that meeting last week.
Looking ahead, Pond says it's unlikely the Fed will take additional policy action until its mid-September meeting but almost certainly by the end of the year, unless the economy does a major U-turn.
"By December it'll be make or break whether they allow Operation Twist to end or come up with a new plan," he says.
Pond's forecast is the Fed will do more by year end and that Treasury rates will continue to fall, predicting the 10-year yield will hit 1.25% by Sept. 30. "We think rates could go lower still," he says. "The market continues to react to uncertainty out of Europe and slower growth in the U.S."