Fed Rides to the Rescue – On a Broken-Down Horse

The Federal Reserve announced today that they will continue Operation Twist through the end of 2012.  Given the ongoing problems in Europe and the widespread weakness in the global economy, the Fed was widely expected to take substantive action to further stimulate the economy.  Unfortunately, a 6-month extension of Operation Twist (on a smaller scale than the original) was not the elixir the market needed.

With long-term interest rates at historical lows, Operation Twist will have little to no incremental stimulative effect on the US economy.  How did the market react?  As you would expect.  US equity markets were disappointed by the news and drifted lower throughout most of the afternoon, finishing the day with modest losses. Gold, Silver, Platinum, Copper, and Crude Oil futures were all down sharply for the day.  With increasing evidence of a weakening economy and limited Fed stimulus, deflationary pressures are becoming more widespread.

To be fair to the bulls, the housing market showed a glimmer of hope yesterday.  Building permits were higher than expected (780K vs. 725K).  However, building permits are still down over 60% from their peak in 2006 - kind of puts the current number in perspective, doesn't it?  Housing starts were lower than anticipated, but last month's starts were revised higher, for a slight net gain.

Perhaps more significant for the bulls, 10-year yields in Italy and Spain have dropped to 5.78% and 6.76%, respectively.  It will be interesting to watch these numbers tomorrow, as Europe responds to the Operation Twist announcement.  In his news conference, Bernanke also stated directly that the Fed would not consider purchasing European sovereign debt.

The Greek vote is behind us, Greece is in the process of forming a coalition government, and the Fed has put their cards on the table.  Perhaps it is finally time for the market to focus on the economy

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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