Federal Reserve does nothing and the markets aren't happy
12/13/2011 5:05 pm EST
At least that’s what I conclude from the drop in stock prices this afternoon after the Federal Reserve’s Open Market Committee gave no indication that it was about to open the floodgates.
I don’t think the markets had any reason to believe that the Fed would decide to unleash a wave of bond buying on the markets. But the lack of a reason has never stopped markets from dreaming. And right now most investors—I know I feel this—would like someone to do something to stop the pain.
The statement from the Open Market Committee actually sounded relatively optimistic. (Granted that when most voices are calling for the end of the world, it doesn’t take much to sound optimistic.) “Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed said. “The Committee continues to expect a moderate pace of economic growth over coming quarters”
Given that view, the Federal Reserve decided to stay on the current course. The Fed will continue its current policy of buying longer maturity Treasuries when short-term Treasuries in its portfolio mature. That means the Fed has no plan to reduce the size of its portfolio, but that it also has no plan for anything like a third program of massive quantitative easing.
Inflation remains subdued and consequently the Fed affirmed its current promise to keep short-term interest rates near zero until some time in mid 2013.
The global economic slowdown does pose a downside risk to the U.S. economy and the Fed is prepared to move—in some fashion—if that slowdown looks like it is about to damage the U.S. economy, the Fed said in conclusion.
But no big game-changing intervention today. Sorry markets.