The Fed Speaks…The Market Does Backflip

August 9th, 2011 at 5:00 pm

The Fed statement came out, the markets swooned, then bounced back much higher.  Go figure.

I think investors liked the Fed’s putting a date—mid-2013—on their earlier “we’ll keep rates low for an extended, but unspecified, period.”

That’s a good move, and an important one, because it shows that the inflation hawks on the committee appear to have lost that fight for now.  And, in fact, three members dissented, which is very unusual (has that ever happened before?).

So that explains the elevated close of the market today.  But why the big dip when the Fed’s statement was first released.  That’s important too.

That was due to no new “quantitative easing.”   According to the statement, the Committee “discussed the range of policy tools available to promote a stronger economic recovery” and then instead decided to keep them in the tool box, saying they were “prepared to employ these tools as appropriate.” 

Not unexpected, but too bad.  As I wrote this AM, I’m not sure more quantitative easing would do much, but it could help at the margins and it’s not at all clear to me why, if you have tools, NOW isn’t the appropriate time to use them.

On a related note, from the “Hey, S&P—nobody cares what you say anymore!” department, bond investors continued the seek the safety of US Treasuries.  The 10-year Treasury was yielding 2.28% and few minutes ago. 

(H/T Brian Highsmith for help with this post.)

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