Fed Chairman Ben Bernanke said back on Aug. 27 that the Fed will do whatever it takes to support the economic recovery that lost its momentum early in the summer.
In the statement after its FOMC meeting yesterday the Fed expressed further disappointment in the economic recovery, but made no changes to combat the slowdown.
In its statement the Fed said the economic recovery has slowed again since its last meeting in August, noting that consumer spending remains constrained by high unemployment, modest income growth, lower home prices, and still tight credit. It said that business spending has continued to slow since earlier in the year although at a slower pace, employers remain reluctant to hire new employees, housing starts are at a depressed level, and bank lending has continued to contract.
Yet in response to the worsened condition, all it said was that it will maintain the Fed Funds rate at 0 to .25% “for an extended period”, exactly as it has been saying for a long time now, while making no policy changes such as announcing another round of ‘quantitative easing’ (buying bonds and mortgage securities to try to keep long-term rates down), which the market had hoped for.
So, in a nutshell the Fed says the economy has worsened but it is going to wait and see what happens. Its next meeting is in late November.
How could that possibly be seen as a positive for the economy?
But Wall Street immediately touted the statement as a positive because in the next to last paragraph of the statement the Fed said it will continue to monitor developments and is prepared to provide “additional accommodation” down the road if needed. Wall Street says that means it will initiate quantitative easing in the not too distant future.
To begin with, how could that be a positive, since the statement made it quite clear that the Fed will take further action only if the economy worsens even more.
Furthermore, that paragraph actually says nothing different than the same paragraph in its statement after its August meeting.
See for yourself.
After its August meeting the paragraph said,
“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”
After yesterday’s meeting the paragraph says,
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
Wall Street did get a brief kneejerk rally out of its positive interpretation of the Fed’s statement, for a half hour anyway, the Dow spiking up more than 100 points in 30 minutes before plunging again to being up only 7 points at the close, with the S&P 500 down for the day.
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