Approach fails to deliver bold jolt,
Approach seen as a modest shot in the arm
NEW YORK — Despite lowering its economic outlook Wednesday, the Federal Reserve failed to deliver the type of performance-enhancing Markets stimulus jolt Wall Street wanted, opting instead for what amounts to a vitamin B-12 shot rather than a more powerful dose of steriods.
Ever since the 2008 financial crisis, stocks have been driven higher by artificial stimulus from the Fed. And with the economy growing at a sub-par rate, Europe’s debt crisis creating a further drag on business activity and the Fed’s “Operation Twist” stimulus program set to expire next week, Wall Street hoped the Fed would announce a bold plan to boost the economy and stocks.
But instead of announcing a sizable new round of cash injections into the financial system via a bondbuying program known as quantitative easing, or QE, the Fed took a less-aggressive approach by extending its existing Twist program through year’s end. While Fed Chairman Ben Bernanke insisted the $267 billion Twist program — intended to goose economic activity by forcing down long-term interest rates through selling short-term U.S. Treasuries and buying long-term bonds — will “provide support” to the economy, investors were underwhelmed.
“The market was a little bit disappointed that they got more of the same,” says Jeffrey Kleintop, chief market strategist at LPL Financial. Twist, the third round of Fed stimu- lus after two rounds of QE, has not had an outsized effect on juicing the economy or creating jobs.
Still, Kleintop said there were positive takeaways. The Fed did not end its stimulus program nor rule out launching a bigger stimulus package, or QE3, if conditions worsen.
Stock investors fear a replay of the bad reaction that followed the end of QE1 and QE2. The broad market suffered drops of 16% and 19% when those earlier rounds of stimulus ended. Wednesday, the Standard & Poor’s 500 index fell 0.2%.
Even though Bernanke said in a press conference that the Fed has “more ammo” to combat weak growth, many on Wall Street feel the Fed’s ability to jolt markets is waning. “The Fed’s influence is diminishing,” says Bill Hornbarger, chief strategist at Moneta Group. With interest rates at historic lows, pushing them slightly lower will do little to goose the economy, he says.
At this point, Wall Street might get a bigger lift from central bankers in Europe injecting massive stimulus into the system there to stabilize its debt crisis. “What the European Central Bank and Germany’s Bundesbank do is probably more important than the Fed,” says Michael Strauss, Commonfund strategist.