It was one of the most dramatic moments so far in the current financial crisis,
In a brief 45 minutes or so of regular trading, and then furious after the bell dealings, US shares jumped, market interest rates plunged, the US dollar fell out of bed, the Aussie currency jumped sharply, gold soared, copper bounced and oil picked up… all because of a few words from the Federal Reserve in its post meeting statement yesterday morning.
The ramifications of this move were felt around the world as commodity prices and shares rose, the US dollar weakened, bond prices eased and stunned investors, especially in the US, wondered why now.
OIl and other commodities, especially gold rose overnight Thursday for a second day, sharemarkets were mostly higher, but wary.
The Financial Times’ Lex column remarked that "they will be dancing in the streets of Beijing” because move by the Fed will support any concerns the Chinese government may have had about the value and security of their huge holdings of US government debt (close to $US800 billion at last count).
Another FT correspondent wondered if the Fed’s move represented a belief that the US Congress would not pass another bank bailout funding bill after the revelations of huge bonuses payments at Merrill Lynch and AIG.
The writer asked ‘What does the Fed know that we don’t know about the banks?’
All solid points and a very good question about the health and state of US banks, despite those claims from more groups to have had ‘profitable’ Januaries and Februaries.
Interest rates fell with US mortgage rates dropping by around 0.30% to close at 5% or so for 30 year products.
The Fed also made it clear that its key rate would remain where it is in the range of 0% to 0.25% for "an extended period".
That was a more explicit vow to stay on hold with rates for a prolonged time than it had offered in recent months. It wasn’t hard to see why the Fed said it that way.
The US economy is looking terrible and there was no talk of a recovery soon, just a mention that it may happen, whenever.
No mention of an upturn later this year, which would build into 2010. No talk of ‘green shoots’ appearing either.
While the quantitative easing took the spotlight, the reasons for the move were contained in the comments about the US economy.
They were gloomy, probably the gloomiest the Fed has written for some time.
"Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.
"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.
"Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.
"U.S. exports have slumped as a number of major trading partners have also fallen into recession.
"Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
It then went on to detail the ground breaking moves in this statement:
"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.
"Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."
After months of talking about, dabbling a bit at the edges, the Fed has plunged headlong into the most dramatic change in monetary policy the US has seen for decades.
It adopted a policy of "quantitative easing": virtually printing money because interest rates are so low as to be no longer effective in stimulating the economy.
The plans to buy $US300 billion of US government debt, a move that was completely unexpected (although an argument was said to be on the cards on the issue at the Fed meeting).
The Fed also revealed plans to double its purchases of US government agency debt, especially home mortgage-linked securities: up to $US1.45 trillion worth.
Quantitative easing is a phrase much beloved of bankers, economists and others in the theoretical: it was tried unsuccessfully in Japan in the 1990s, the UK started its version a month ago and the Swiss Central Bank is also doing it (and has cut rates).
But the UK move seems to have been successful and some commentators claimed the Bank of England’s move may have helped settle the argument in the Fed on the issue.
As wel
