US markets said ‘thumbs down’ to the US Federal Reserve’s latest attempt to stimulate the US economy this morning.
The Fed said it will sell $US400 billion worth of short-maturity bonds (up to three years) it holds and reinvest in bonds maturing between 6 and 30 years by the end of June next year, confirming market expectations that it would revive the 1960s-era program dubbed "Operation Twist."
The move failed to budge sharemarkets in the US which ended the day deeply in the red, after a similar finish in Europe.
US stocks doubled their losses in the last half hour of trading, the Dow dropping 2.5% by the end.
Australia and other markets in Asia will fall this morning as a result, after small rises yesterday.
Gold and oil also weakened sharply after the Fed’s announcement at the end of a two day meeting.
Gold fell $US24 to around $US1785 an ounce, a fall of 1.3%, Oil fell 2.5% to just over $US84 a barrel.
Copper fell in late trading, after rising earlier in the day.
And the Aussie dollar lost nearly 2 US cents to drop to under $US1.0050 after the Fed’s announcement.
European markets had earlier fallen because of a lack of progress on the next payment to Greece, which will be delayed to next week.
So European markets will weaken tonight as they catch up to the US reaction.
The Fed’s move did have the required impact on Treasury securities: the yield on two year bonds rose 0.4 to 0.21% (The Fed will be selling these), while yields on 10 year bonds fell 0.6% to $1.88, a record low.
Yields on 30 year bonds dropped to 3.07%, down 0.14%, but still a long way from the all time low of 2.57% set during the GFC.
The latest move takes the amount spent on easings to $US1 trillion after the $US600 billion spent up till June by the central bank on US Treasury securities.
By a 7-to-3 vote, the Fed also said it will reinvest proceeds from maturing mortgage-backed securities into mortgage-backed securities, instead of its previous practice to buy Treasuries with the proceeds.
The Fed kept its target Federal funds rate between 0% and 0.25% and kept its pledge, first announced in August, to keep rates at exceptionally low levels through the middle of 2013.
The Fed said that "economic growth remains slow" and inflation will settle at or below levels consistent with its dual mandate.
It said that recent indicators point to continuing weakness in overall labor market conditions, "and the unemployment rate remains elevated."
"Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased.
"Investment in nonresidential structures is still weak, and the housing sector remains depressed.
"However, business investment in equipment and software continues to expand.
"Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks.
"Longer-term inflation expectations have remained stable."
Seeing the key 10 year yield is already under 2%, and closer to 1.9%, it is going to be a mighty struggle to lower these long dated yields any further, or to the point where it encourages more people to borrow.
The impact will be limited and take a long time to have any significant boost.
If it is to get people borrowing for housing, then they are, but they are taking advantage of record lows for mortgage rates to refinance existing loans.
Around 23% of loans currently are for home purchases, and that is merely churning, not generating new demand.
And then there are events in Europe: Greece will probably get the 8 billion euros of new cash from the IMF, the ECB and the EU, which should put off any new fears until December-January.
Italy will struggle through, Portugal could be a new fear with talk it needs more billions. Only Ireland, among the failed economies, seems to be doing OK.
The Fed mentioned concerns about offshore financial conditions in its post-meeting statement, the first time these fears have been raised for quite a while.
The last Fed easing sparked a surge of speculation in commodities like gold, oil and copper and pushed stockmarket higher.
But some of those rises (especially oil) helped, along with the impact of the Japanese disasters in March, and the new fears in Europe, to derail the global economy and especially those in the US and Europe.
And, underlining the pressures in banks, Moody’s cut the ratings of Bank of America, Well Fargo and Citigroup.
More uncertain days ahead.
