The FOMC meeting concludes today with the market widely expecting the Fed to implement a new program to help stimulate the economy called Operation Twist. The Fed has a dual mandate which is to keep inflation in check and promote employment. With the economy struggling along and the unemployment rate remaining around 9% expectations are that the Fed has to do something to stimuate growth. Back in the 1960s, the Fed implemented a program called Operation Twist so named because "The Twist" was a popular dance craze at the time. The Fed bought longer term bonds and sold shorter term bonds on their balance sheet to flatten the yield curve.
"By doing so the Fed drives down the desirability of 'safe' investments, making riskier options like investing in a business instead of government debt more attractive," says an article on Yahoo! Breakout.
This hopefully encourages investors to take on more risk by selling government bonds and buying stocks. It also could potentially help the housing market by lowering borrowing costs. The Fed is to make an announcement later today on what if anything they will do to help stimulate the economy. Whatever they do, it will move the markets.
FOMC statementWell the Fed statement came out and as expected is going to implement the program known as "Operation Twist". From the FOMC statement...
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."
Stocks reacted negatively to the news with the DJIA now plumbing new session lows down some 170 pts.
Final RecapWow, the markets did not like that at all! The Dow went straight down after the FOMC meeting results finishing 282 points lower! I don't know what happened to set off all that selling and will have to look into it. I suspect it is the algos that run the markets nowadays took the markets down because of no surprise stimulis from Bernanke. Regardless, it looks as if we are heading back down the trading range and I suspect we might break through the bottom this time. Lots of global growth names are getting slammed right now like CAT and EM's look very weak and of course Dr. Copper who has a PHD in economics is signaling problems. I might put on a R2K short tomorrow or a European short. I don't like the looks of this market right now. Today's reaction to the Fed was pretty bad.
Disclaimer: Nothing in this blog should be construed as a recommendation to buy or sell any securities! Please do your own due dilligence before buying any stocks or bonds!