Tuesday, August 9, 2011

Market Reaction To FOMC Announcement

(Before data was taken at 2:00 pm, After data was recorded at market closing prices)

S&P 500
Before : 1138.64
After : 1172.53

2 year
Before : 0.27
After : 0.20
10 Year
Before : 2.33
After : 2.26
30 Year
Before : 3.68
After : 3.64

Inflation Expectations
2 year inflation swaps
Before : 1.43
After : 1.39

5 Year TIPS Breakeven rate
Before : 1.81
After : 1.78

10 Year TIPS spread
Before : 2.27
After : 2.22

30 Year TIPS spread
Before : 2.64
After : 2.61

Bloomberg Commodity Index
Before : 1601.42
After : 1598.48

Before : 1.4221
After : 1.4339

(Data from bloomberg.com)

The market reaction to the Fed announcement today was certainly interesting. Fed Funds Futures unsurprisingly fell in reaction to the commitment to leave them at 0% until 2013. Equities took a while to figure out how they felt, seesawing up and down before finally rising about 3% from their pre-meeting rallies. Treasury yields fell, especially at the medium end of the curve (only because the short end can't fall any further). Inflation expectations also fell slightly as well, along with commodities and the dollar. 

Personally I think the Fed announcement was underwhelming. Committing (whether loosely or strictly, no one really knows how serious they are about this commitment, or even whether it is a commitment at all - are they simply predicting they will need to do this?) to leaving rates at 2013 is another way of telling us that they predict a significant output gap will remain at least until then and won't take the necessary actions to do anything about it. Is there anyone who isn't thinking about Japan now?

The dissents are puzzling... if 3 members are going to dissent, why not do something more like lower interest on reserves? Maybe they would have had even more dissents if they did, if so, we are in serious trouble... if not, they obviously should have tried more. Christina Romer said the dissents might be a sign Bernanke is now more willing to work without unanimous approval of policies, but why not do more right now?

I don't blame markets for their "confusion"... I'm not really sure how to read this either. It was certainly better than nothing, but not much better. Much more stimulus is needed. Still, today once again demonstrated that markets don't buy either liquidity trap or easy money stories.

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