Wednesday, June 20, 2012

Monetary Ammunition: Part Two

Yesterday I wrote about the effect of investor expectations following any new expansionary Fed policy. More news today along those lines.

From Reuters:

A slower pace of U.S. hiring and signs that Europe's nearly three-year-old debt crisis is threatening global growth have raised expectations for more help from the Fed, though it remains unclear just how much help it will offer.
"There is a pretty high level of uncertainty as to what they are going to do," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.
"The consensus is they are going to extend Operation Twist but it is by no means a certainty and everybody wants to wait and see what the decision is going to be."
That uncertainty kept a lid on U.S. stocks, which entered Wednesday's trade on a four-day winning streak.
I'd rephrase that bolded sentence to say "kept a floor under U.S. stocks". Given that new monetary injections are unlikely to have any strong positive effects (diminishing returns to policy action) then uncertainty might be a blessing for markets.

The fact that U.S. Treasury Bond prices declined while waiting for the Fed to announce its policy helps demonstrate the strong effect that expectations can have on prices.

Edited to add update (1:52 PM, EST): Operation Twist has been approved:

The announcement met with a mixed reaction in financial markets. U.S. stocks initially slipped but then moved higher, while bond prices briefly rose. The dollar fell against the euro and rose against the yen.
"This is a small step. This is probably the least of their unconventional easing tools that they could have used," said Ethan Harris, North American economist for Bank of America/Merrill Lynch in New York.

About what one would expect. Hooray?

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