FOMC Statement Kills Rally, Brings Out Sellers
On Tuesday, the Federal Reserve released its last FOMC statement of the year, killing a 100 point rally in the Dow in the process. Although the Fed statement was a tad bit more optimistic than normal, in these strange financial market times, this is being interpreted as bearish. The reason? The market is hooked on Fed liquidity, and without QE3 and the corresponding dislocations in asset prices that it would create as investors rush out of the U.S. Dollar, there isn't very much to get excited about.
Markets have been reacting to fiscal and monetary policy almost exclusively since the financial crisis, and in the absence of any new developments on that front, "might as well sell" is the prevailing sentiment. The FOMC statement noted that "indicators point to some improvement in overall labor market conditions," and that the U.S. economy continues on a trajectory of modest growth.
This is evidenced by third quarter GDP of 2% and the most employment data indicating that the unemployment rate has fallen to 8.6%. The FOMC also said that inflation expectations have moderated, which would appear to be a positive sign on the surface, but is being interpreted by the market as a sign that deflation could be around the corner - investors have been selling commodities (except crude which is up on news that Iran has shut down the Strait of Hormuz) furiously in the wake of the FOMC release with gold down more than $30 to $1,631 in a little over an hour.
On the downside, the Fed statement noted that the housing sector remains "depressed" and that "strains in global financial markets continue to pose significant downside risks to the economic outlook." Not surprisingly, the Fed said that it will continue to extend the average maturity of its balance sheet by reinvesting principal payments into agency-backed mortgage-backed securities (Operation Twist) in an effort to further bring down interest rates across the yield curve.
The central bank has also pledged to continue with its ZIRP interest rate policy until at least the middle of 2012. The stock market has sold-off in the wake of the FOMC, with the dollar and Treasuries spiking sharply in the wake of no new news on the QE3 front. At last check, the Dow was down around 80 points at 11,942, the S&P 500 had lost 13 points to 1,223 and the Nasdaq Composite had shed 1.47%.
