FOMC Saves Its Ammo
The Federal Reserve met consensus expectations today by extending their "maturity extension" program, otherwise known as Operation Twist. But some big name economists are left sorely disappointed, namely Jan Hatzius of Goldman Sachs who said this week he would be very surprised if the Fed didn't announce another Large-Scale Asset Purchase program, or so-called QE3.
This appears to be a fairly standard page from the FOMC playbook: act boldly when the economy really needs it, and communicate steady support and a ready willingness to act more aggressively when conditions warrant.
As I write, Ben Bernanke has begun his press conference and Fed-watchers everywhere are dissecting their economic projections for GDP, unemployment, and interest rates. There will be much to analyze from the Q&A, but right now I will highlight a few key headlines that will be parsed to answer this question:
"Is the Fed holding off on QE3 until they have more evidence about the health (or decline) of the labor market and/or until Europe gets worse?"
Fed significantly lowers GDP growth forecasts since April:
2012 central tendency drops to 1.9--2.4% from 2.4--2.9%
2013 central tendency drops to 2.2--2.8% from 2.7--3.1%
Operation Twist continuation to year-end with $267 billion seems "small"
But if you look at the first OT program of $400 billion from September 2011 through June 2012, $267B is actually 2/3 and is scaled to the same pace for the remaining six months vs. that 9-month period.
Bernanke says "rates can go lower"
He knows and states unequivocally that the Fed has "considerable scope to do more," especially if the labor market weakens further
Answering lots of questions about "what else can you do with rates so low?"
The press conference is must-see-TV for anyone who wants to understand the Fed's views of the economy and their tools to react. For instance, in one response, Bernanke says if the Fed buys Treasury securities, it encourages other market participants to look elsewhere for yield like "buying corporate bonds instead."
Steve Leisman asked a great question about whether the Fed's actions are seen as too incremental
Bernanke responded by saying that "stock" matters. What he means is that even if they don't buy any new securities, the ones they own support the market. There is much debate about this point. Some economists think that a "steady flow" of new purchases are required to maintain low rates. Maybe with interest rates so low for the "cleanest dirty shirt," there is no argument here now
Lastly, a question came about whether the Fed will help Europe by buying their debt
It sounded like Bernanke almost choked. Just as Merkel isn't printing eurobonds any time soon, he is not buying Spanish or Italian bonds in this lifetime.
CRAZY volatility since the 12:30ET announcement! Spike to new lows, then rally to new highs (the Russell 2000 at least), then back down toward the lows!!! Why the rally at all? Mere high-frequency driven short-covering?
Question of the day: Is the stock market "okay" with today's Fed action because it didn't need the boost and would prefer the ammo is saved for when the economoy really needs help?
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