Fed Action Lifts Indexes Briefly, Bernanke Defends Policy

Bikram Pandey
20 Jun, 2012
New York City

U.S. markets reversed the course after Fed extended its program to switch to long term bonds till the end of the year. The U.S. Treasury yields declined and indexes briefly traded in the positive before settling back to flat line. Gold and copper fell more than 1% and oil declined 2.6%.

[R]4:00 PM New York – U.S. markets reversed the course after Fed extended its program to switch to long term bonds till the end of the year. The U.S. Treasury yields declined and indexes briefly traded in the positive before settling back to flat lines. Gold and copper fell more than 1% and oil declined 2.6%.[/R]

U.S. Treasury yields fell after the Fed extended and expanded its Operation Twist program to the end of the year and held target interest rate near zero. The move knocked off rates on 10-year bond to 1.61% and 30-year bond to 2.75%.

U.S. stocks reversed earlier losses after the Fed announced new measures to stimulate the economy.

The so called Operation Twist launched in September last year with $400 billion program to replace short term bonds with long term bonds will be extended and expanded.

The program was scheduled to expire at the end of this month and will now continue till the end of the year and will be expanded by $267 billion as the Fed hopes to lower long term rates. The Fed also left its program of investing in housing debt supported by government agencies unchanged.

Fed in a separate report also lowered its estimate of growths as far as 2014 and also estimated higher than previously expected unemployment rate in April and softer inflation over the next three years.

Fed Chairman Ben S. Bernanke said at a news conference after the release of the statement monetary policy is not the only solution to revive the economy and any help from the Congress and White House are welcome.

Bernanke also stressed that the Fed still has several tools at its hands though they may be non-traditional but they are effective in stimulating the economy. He added that access to credit is “more stringent” and to an extent it “limits” the impact of the Fed actions. He stressed that it is not fair to say that general public has not benefited from the Fed policy because it has provided indirect support to corporate borrowing and automobiles purchase lending.

Fed lowered its economic growth estimate in 2012 to between 1.9% and 2.4% from its earlier projection between 2.4% and 2.9% and unemployment rate is now expected to peak at 8.2% compared to 8% and inflation is estimated between 1.2% and 1.7% from 1.9% to 2%.

Fed also lowered its estimates for 2013 and 2014.

Central banks around the world are working in coordination to sustain global economic expansion and latest minutes of meetings released by the Bank of England showed a strong bias in favor of stimulus and Bank of Japan indicated its willingness to ease.

Central bank in China cut rates on June 7 and European Central Bank is likely to ease on July 5 meeting after holding rates firm earlier this month.

European markets cautiously traded higher on the optimism that banking industry integration will break the debt spiral in the highly indebted nations in the region.

German producer price inflation slowed more than estimated in May. Economic confidence in Sweden and Danish consumer confidence fell in June. Italian current account deficit narrowed in April.

The UK indexes traded higher as investors shifted focus to the Fed announcement later today after G20 leaders focused on the euro zone. UK jobless claims rose unexpectedly in May. AstraZeneca completed acquisition of Ardea Biosciences.

Nikkei index in Tokyo rebounded sharply after a statement from the G20 lifted hopes for an action plan in the euro zone and speculators bid up stocks ahead of the U.S. Fed announcement later today. Investors turned attention to domestic companies as the yen stayed strong.

Australian stocks closed higher and international events dominated local trading. News Corp offered $2 billion to acquire Consolidated Media and announced restructuring of its local operations. Housing starts plunged in the March quarter.

Commodities, Bonds and Currencies

The 10-year bond yield decreased to 1.64% and 30-year bond fell to 2.71%.

The U.S. dollar inched up to $1.275 to a euro and rose against the Japanese yen to 79.62 yen.

Immediate delivery futures of Texas crude oil decreased $2.28 to $81.75 a barrel and for Brent crude was nearly fell by $3.16 $92.58, futures of natural gas fell 0.02 cents to $2.52 per mbtu and gasoline price decreased 4 cents to 260.15 cents a gallon.

In metals trading, copper fell 4.45 cents to $3.34 per pound, gold fell $19.00 to $1,604.20 per ounce and silver decreased $0.28 to $28.08.