Why the Fed's Inaction Doesn't Matter

08/01/2012 5:23 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

So what if Bernanke and friends decided not to throw another steak in the piranha tank? The ECB may be pulling up with a whole side of beef tomorrow, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Weaker, but not weak enough to move the Federal Reserve to action.

“Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year,” the statement from the Federal Reserve’s Open Market Committee read today.

But the US central bank didn’t announce a new program of quantitative easing, or even extend its promise to keep rates exceptionally low through at least the end of 2014.

The former—a new program of buying of Treasuries or mortgage-backed assets—was an outside chance, market wisdom held in the days before the Fed meeting. But the latter had been gaining support as a likely alternative to any more drastic action. However, the Fed did even less than expected, with only a vague gesture toward slowing economic growth.

But even that disappointment didn’t move US stocks significantly—the S&P 500 stock index was down just 0.29% for the day at the close—because all eyes remain focused on tomorrow’s meeting of the European Central Bank.

Traders are excused if they didn’t want to put on new positions today, in either direction, since tomorrow’s announcement has the potential to move the market big time. I think that’s especially true if the actions announced by ECB president Mario Draghi turn out to fall short of the comprehensive package of interest-rate cuts, increased bank lending, and resumed bond buying that Draghi sketched in over the last week.

The euro fell today by 0.63%, to $1.2226. I don’t think that’s an indicator of the market’s view of what tomorrow might bring from the European Central Bank. Rather, I think the US dollar rallied slightly against the euro on news that the Fed wouldn’t be undertaking any policy that pumped large numbers of dollars into the US economy.

The schedule for tomorrow calls for an announcement from the European Central Bank at 7:30 a.m. Eastern time—before the market open in New York—and then a press conference with Draghi about 45 minutes later.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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