Stock Market Falls Sharply on Move by Fed to Shore Up the Economy

Sometimes the Markets are Just Plain Perverse

On Wednesday the Federal Reserve System took the extraordinary step of intervening in bond markets in a manner to “twist” interest rates so that long term rates would fall while allowing short term rates to increase.  So why should news that policy to increase economic activity and growth not only fail to raise stock prices, but actually work to lower them?

The answer is that the Fed’s policy position was confirmation of what many (most, ok, all) observers were feeling about the economy.  The Fed just poured out the bad news.

The downturn was set in motion on Wednesday after the Federal Reserve announced that a complete economic recovery was still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

And

The Fed pointed to a number of long-term problems in the American economy, including high unemployment and a depressed housing market. 

There is also this conclusion, strongly shared by The Dismal Political Economist that these actions by the Fed, and indeed any actions by the Fed are just not likely to do much good.  Monetary policy is much weaker in trying to stimulate an economy than it is in trying to slow down an economy, and whatever the Fed could do, they have done.

“The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to ‘ride it out’ over a long period of time,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company.

So thanks Mr. Bernanke for standing up to Republicans who wanted you to raise interest rates and contract the economy even further for their own narrow political purposes.  And thanks for trying, but looks like the U. S. is going to have to manage this recovery, if it can, without you.