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Bulls Pout as Fed Stands Pat: Stage Set for “More Action” in 2012, Girard Says

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U.S. futures are turning lower and the euro fell below its key $1.30 level this morning as markets react to an Italian debt sale and the FOMC's decision to leave monetary policy unchanged at Tuesday's meeting.

The Federal Reserve left rates at zero Tuesday and reiterated plans for 'Operation Twist,' as was widely expected. The central bank says the economy is "expanding moderately" but said unemployment remains "elevated" and that "significant downside risks" remain.

In the end, the Fed did not signal any new policy action to jumpstart the economy, which left Wall Street disappointed.

After trading as high as 12, 148 ahead of the FOMC announcement, the Dow slumped into the close to finish down 0.6% to 11,955. Gold also fell sharply as the dollar hit an 11-month high vs the euro as the Fed kept its powder dry - for now.

"Most economists polled weren't expecting any changes but you know how the markets get: I think they were maybe looking for something more, maybe paving the way for more action in 2012," says Michele Girard, senior economist at RBS.

Specifically, there was chatter ahead of the meeting that the Fed might cut the discount rate (the rate at which the Fed lends to banks), announce plans to start targeting inflation or more directly signal another round of quantitative easing is imminent.

"Against that kind of speculation, getting nothing new was viewed as a disappointment," Girard says.

Still, if there's something Wall Street wants, it typically gets it from the Fed -- especially Ben Bernanke's Fed. (See: Taken to Task: Ben Bernanke and His Bankster Buddies.)

"They have set the stage for more action in 2012," Girard says, citing signals from the Fed about publishing its own expectations for the fed funds rate and, more dramatically, setting the stage for another round of QE focused on purchasing mortgage-backed securities.

The Fed is "leaning toward providing more accommodation," she says.

On Tuesday, the market leaned back on the Fed, expressing its disappointment and impatience.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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