Fed Stays Still, Admits Economy Is Worse At August 1, 2012 Meeting – President Obama Talks To Hollande:
The market stood firm today after what was largely expected -happened. The Fed didn’t move on QE3 but said they planned to keep a low interest rate through 2014. We believed the market would be under pressure after the announcement and it was briefly. This presented some buyers with an opportunity to pick up stocks as they await news from the Bank of England and the ECB.
Some analysis that was floating on social media networks by economists, traders and market participants was that the ECB or Bank of England might do the Fed Reserve Bank’s bidding for them. President Obama even got involved in the ECB debate with a note out today stating he had talked to France’s new President Hollande. This may have put a slight ECB biased bid in this market which is already being held up by the Bernanke put.
Volatility wasn’t markedly higher as some would expect from disappointing Fed news. That’s because the news was largely projected and no analysts were sure of QE3 coming although news reports from last week suggested it might come today. With the jobs number due out Friday for the month of July 2012, it was unlikely the Fed would jump ahead of this number but it’s now more likely the Fed will move inter-meeting if the number is dismal again. The Fed’s language today was particularly harsh and they were clear to state they recognize the soft current economic trends.
Here is an excerpt of the Fed Statement Today:
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.
The Fed won’t admit significant downside risks exist – and ignore them.