Wednesday, Sept. 21, 2011 4:57 PM – Fed Announcement Disappoints Markets

The Fed announced this PM that it was selling short-term securities to buy long-term. This is an effort to bring down long-term interest rates like mortgages, just as they have with short-term rates. The slang term for it is Operation Twist.

Also, proceeds from maturing holdings, and there are many since it has concentrated on short maturities, will be invested in buying the mortgage market and trying to force mortgage rates lower.

But really, how much lower rates do you think banks are going to lend at? Do you really think mortgages of 30 years will go from 4% to 3% and 15 years from 3% to 2%? I really doubt it. If they did, would it make much difference in home-building or debt reduction?

However, the bond market anticipated a good bit of this attempt to lower long-term rates and has already lowered the rate on the 30-year treasury by about 25% in the last month, down to 3.04%. That’s a 30-year rate, folks. Would you loan money to the US government for 30 years for a lousy 3% with all the doubt about America’s economic future? Not long ago you wouldn’t have settled for a 1 year CD at 3%, let alone 30 years.

The FOMC announcement was significantly more downbeat on the economy than the August statement, dropping language about signs of improvement and merely temporary problems. It cited global financial issues as a risk factor.

What the Fed and the rest of the DC crowd don’t seem to get is that low rates and runaway federal spending are not boosting the economy. Instead, their constant intervention is keeping everyone confused and reluctant to commit to investing in the economy and hiring the unemployed. Every CEO wants instead to wait to see what other bright ideas Washington has up their sleeves.

What Washington really needs to do is to go home and let the unwinding of the great debt bubble run its course. Stability and predictability is what CEOs want, not this constant thrashing around. I remember the mantra when politicians first tried selling us on stimulus, “The one thing we can’t do is nothing.” Actually, that would have been better.

Significantly, there were again 3 dissenting votes in the FOMC, tying the modern record.

For the full text of the statement go here

Stocks took a an hour to digest the report and then accelerated the sell-off that started earlier in the day. The S&P 500 lost roughly -3%, small stocks slightly more, NASDAQ about half as much at -1.67%. Look for more selling in Asia and Europe when they open tomorrow.

Bonds were higher, gold lost -1.25%, oil was down -1.5%.