FOMC Aftermath

By Sonny Kwon | June 21 2012 11:05 AM

Yesterday the Fed announced that they will extend their yield curve 'twisting' (I am going to refrain from any Chubby Checker references) project until the end of the year, which should amount to a total of 267 billion being redistributed across the yield curve. The logic behind this is that the Fed will drive down long-term interest rates by buying-up longer-dated treasuries. They are funding this by selling their short-dated treasuries, which allows them to manipulate the yield curve without expanding their balance sheet. The market's reaction was mixed as price action in the currency realm whipsawed back and forth for the rest of the trading session. The euro finished the New York session at exactly pre-FOMC levels.

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In their statement, the Fed acknowledged that the domestic as well as international economic situation has deteriorated markedly. They drastically revised down their 2012 growth interval from an initial range of 2.4%-2.9% to 1.9%-2.4%. US equities initially sold off on the suggestion that the market had not priced-in a slowdown of this magnitude into stocks yet.

The action by the Fed yesterday provided the market with just enough to keep traders from running to the hills. The Fed has left often options on the table in terms of policy action, and should the situation in Europe go supernova, they do have some dry powder left in the form of all-out quantitative easing. With the Fed meeting now having come and gone, the market's glaring eye will now turn back to Europe and the eventual European crisis plan that is expected to come out by the end of the month.