Don't fight the Fed is the old saying in stock markets, and traders today heeded those words as policymakers began their two day meeting.
The Fed is expected to indicate to observers it intends to keep interest rates low for as long as required, what's known as a 'conditional' monetary policy. Federal Reserve officials could announce its intention to adjust its balance sheet by either purchasing a wider array of credit instruments (qualitative easing) or by upping the asset side of its ledger (quantitative easing) with the purchase of more credit instruments, including possibly Treasuries. The Fed has expanded its balance sheet during the credit crisis to just over $2.2 trillion from about $800 billion.
At the close of floor trading on the NYSE stocks had completed thier third consecutive positive day. The DOW was on 8174.73 after gaining 58.70 points (0.72%) while the S&P finished on 845.71, up 9.14 points (1.09%). The tech-heavy NASDAQ closed on 1504.09 after rising 15.44 points (1.04%). Bonds were bought and the yield curve narrowed after the government's successful auction of $40 billion in 2-year notes, the largest such sale in history. The yield on the 2-year note fell 3.6 basis points to 0.801% while yield on the benchmark 10-year note fell 11.5 basis points to 2.527%. The dollar traded mixed on the day, gaining 0.24% on the euro while it fell 1.01% against the pound, 0.33% to Australia's currency and 0.180.23% to the yen.
Crude oil for March delivery was recently trading down $3.66 (-8.22%) to $42.00 per barrel as the contago narrowed and more supply came into the market.
Gold for February delivery was recently giving up a bit of the profits from the past several days, down $12.00 (1.32%) to $896.50 per ounce.
In what could be a sign of thawing in frozen credit markets, a 'test' will occur regarding the Fed's commercial paper funding facility. About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve starting in October will mature this week and next, and it could be possible to see between $50 billion to $70 billion of the debt be rolled over and bought by investors. Should that happen the market's ability to absorb the maturing debt may build confidence that U.S. companies are able to fund themselves without government support, which would be a very encouraging sign of credit market confidence. Fed data has shown that investors, betting the commercial paper market has stabilized, pushed interest rates to record lows this month and bought the most 90-day debt since September, just before the collapse of Lehman Brothers froze global credit markets.