While you were sleeping Fed move disappoints

Thursday 21st June 2012

Wall Street showed disappointment with the Federal Reserve’s limited help to bolster the tepid pace of growth in the world’s largest economy, even as Chairman Ben Bernanke promised policy makers were ready to do whatever needed.

"We are prepared to do what is necessary. We are prepared to provide support for the economy," Bernanke said at a news conference following a two-day policy meeting.

The central bank is boosting its so-called Operation Twist - selling short-term securities and buying long-term ones - by US$267 billion. It kept interest rates unchanged as it downgraded expectations for the US economic expansion.

The Fed cut its forecasts for US growth this year to a range of 1.9 percent to 2.4 percent, down from an April estimate of 2.4 percent to 2.9 percent. It also slashed predictions for 2013 and 2014.

“The Fed is going to continue taking long-term assets out of the marketplace,” Bret Barker, a portfolio manager at Los Angeles-based TCW Group, told Bloomberg News. “The Fed’s goal is to take volatility out of the market, keep rates low and stable.”

Investors clearly were hoping for more Fed action.

In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.53 percent, the Standard & Poor's 500 Index declined 0.53 percent, while the Nasdaq Composite Index shed 0.25 percent.

Oil, gold and copper also took the Fed’s news as less than exciting. World oil prices have fallen to their lowest in 18 months, shedding 3 percent, though the decline also was linked to an unexpected increase in US crude inventories.

The US July crude contract, which will expire at the close, fell US$1.94 to US$82.09 a barrel. The more actively traded August crude fell US$1.99 to trade at US$82.36. The August Brent/WTI spread rose 27 cents to US$11.15 a barrel, the narrowest since January.

In Europe, the Stoxx 600 Index ended with a 0.6 gain for the day.

Investors in Europe took heart from German Chancellor Angela Merkel’s comments that she left open the door to bond purchases to help combat the euro zone’s debt crisis.

Merkel, speaking to reporters after meeting Dutch Prime Minister Mark Rutte in Berlin, said there are no concrete plans on bond purchasing, according to Bloomberg. Still, she said, “there is the possibility of purchasing sovereign bonds on the secondary market”.

Earlier Spanish Foreign Minister José Manuel Garcia-Margallo said a potentially controversial Italian proposal for the euro zone's rescue funds to start buying the debt of stricken euro zone countries was “intelligent”.

Bond investors appear to be beating at least a temporary retreat on hopes for a fresh approach to the EU’s debt crisis and news that a coalition government has taken power in Athens.

The yield on Spain’s 10-year bond dropped to 6.77 per cent, ahead of a debt auction by the nation later this week. In contrast, safe-haven German bund yields have extended their rise.

BusinessDesk.co.nz

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