The Fed came and met and may have worked enough magic, with what little it has left in its armory, to steady nervy markets.
The US central bank changed the wording of its key statement and instead of saying interest rates would remain at current levels for an "extended period", now says it will keep rates "exceptionally low" until at least mid-2013.
So effectively, has frozen short-term interest rates for two years and in another hint, opening the door to more quantitative easing.
The rate-setting Federal open market committee said: “The committee currently anticipates that economic conditions – including low rates of resource utilisation and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
The Fed added that it would “continue to assess the economic outlook” and was prepared to employ its policy tools “as appropriate” – a clear hint that it would consider further action.
That brought three votes against the move, but there was a bounce on Wall Street with the Dow up 430 points in the last hour. The S&P 500 jumped by nearly 5% and Nasdaq had a big rally as well, jumping 5.3% in value.
The Swiss franc jumped by more than 5% against the greenback, which will upset the gnomes in Zurich.
Oil fell, and gold, which had finished at a record $US1743 an ounce, bounced to $US1765 on the news that cheap money would still around for two more years, or more.
And the Australian dollar rebounded back past $US1.03 and on the way to $US1.04 and higher. It fell under $US1 yesterday morning and then recovered parity, but jumped 2 US cents after the import of the Fed statement became clear.
In Australia we will be looking for a continuation of yesterday afternoon’s recovery, not that mad selling of the morning.
The three regional Fed presidents who formally dissented against using the new language, Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, said they would have preferred to keep the "extended period" phrase instead.
They are considered to be hardliners, more interested in monetary purity and not in stimulus for the economy.
The last time there was a three vote dissent was back in 1992 when Alan Greenspan was head of the Fed.
Fed policymakers used significantly more downbeat language to describe current economic conditions.
"Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected," the official Fed statement said.
That marks a significant change from prior statements, when the Fed had said the recovery was running along at a "moderate pace."
They also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for "some of the recent weakness" in economic activity, which was also a changed stance from previous statements.
The more explicit time frame is aimed at calming nervous investors.
It offered them a clearer picture of how long they will be able to obtain record low costing credit, and was at least a year longer than many economists had expected.
That means the US might have the current 0-0.25% rate range from the Fed for five years, assuming that the process, which started in December 2008, isn’t extended into 2014 and further by a continuing weak economy.
Having used most of its traditional tools, the Fed has few remaining options to try to prop up the sluggish economy and job market, other than what we saw this morning.
Hence the stronger wording on rates and that But the Fed indicated it is considering a "range of policy tools available to promote a stronger economic recovery," and "is prepared to employ these tools as appropriate."
This language was much stronger than in the post meeting statement in June, when the Fed only said it would "monitor the economic outlook" and "act as needed."
But that’s understandable given the gloomy flow of data since, especially those big revisions to GDP, consumer spending, continuing weak jobs data and a growing slowdown reported from more of the Fed’s 12 reporting districts.
And there was of course, the biggest negative of all, the S&P downgrade of America’s AAA credit rating and the damage that has wrought to markets and confidence.
With attention focused on the markets and the US and Europe, China slipped a bit of unwelcome news out yesterday, its inflation figures for July which showed another big rise.
For the second month in a row, China released the inflation data ahead of other monthly figures to forestall leaks.
The news wasn’t promising; China’s consumer price index rose 6.5% in July from the same month in 2010; that was the biggest rise in more than three years.
It was up from the 6.4% rate in the year to June.
The stubbornly high inflation rate is still being driven by rapidly rising food costs, which rose by 14.8% in July from a year ago.
The main driver for that was another surge in pork prices, up nearly 57% in July after a similar rise in the year to June.
On a month-on-month basis, the CPI increased 0.5% over June, that’s an annual rate of just over 6%, so the upwar
