All eyes were on the Federal Reserve on Thursday. Market
participants expected the Federal Open Market Committee to announce
a third round of quantitative easing in order to help a sluggish
economy and hopefully trigger a decline in the unemployment rate.
The major averages meandered around the breakeven line leading up
to the 12:30pm ET announcement.
The Federal Reserve said that it would buy $40 billion worth of
mortgage-backed securities each month on an open-ended basis.
"We're looking for ongoing, sustained improvement in the labor
market," Chairman Ben Bernanke said in his press conference today
in Washington which concluded a two-day meeting of the Federal Open
Market Committee. "There's not a specific number we have in mind.
What we've seen in the last six months isn't it."
In combination with other policy measures, today's announcement
means that banks will have access to an additional $85 million in
funds per month, courtesy of the Fed. Although the size of QE3 is
considerably smaller than QE1 or QE2, the open-ended structure of
the bond buying program is a new twist in the Fed's tool kit.
The central bank's statement said that "If the outlook for the
labor market does not improve substantially, the Committee will
continue its purchases of agency mortgage-backed securities,
undertake additional asset purchases, and employ its other policy
tools as appropriate until such improvement is achieved."
In addition to announcing the new round of asset purchases, the
FOMC also extended its language on interest rates. Previously, the
central bank has said that short-term rates will remain near zero
until mid-2014. In Thursday's statement, that language was changed
to mid-2015. The central bank also said that it will continue with
its "Operation Twist" program whereby it sells shorter-term
securities to buy longer-dated debt.
In addition, the statement indicated that the Fed would continue
to reinvest its portfolio of maturing mortgage-backed securities
back into housing debt. The goal of these monetary policy maneuvers
is to further drive down interest rates and add liquidity to the
economy in the hopes of stimulating stronger economic growth and
lower unemployment. Eleven of the twelve FOMC members voted in
favor of Thursday's policy measures with the lone dissenter being
Richmond Fed President Jeffrey Lacker.
The extent of the Fed's latest round of monetary policy
prescriptions seemingly was above and beyond market expectations,
as stocks surged in the wake of the announcement. After trading
just north of the unchanged line leading up to the decision, stocks
climbed throughout the rest of the session, with the Dow adding 206
points to close at just below 13,540. The widely watched blue-chip
average traded in a range between 13,325 and 13,573.
Markets may also have been heartened by slightly more optimistic
economic forecasts which the Fed also released on Thursday. The
central bank now projects that unemployment will be between 6.7
percent to 7.3 percent by 2014 versus its previous expectations for
7 percent to 7.7 percent unemployment. By 2015, the Fed thinks that
unemployment will be down to 6 percent to 6.8 percent. Economic
growth is also expected to pick up, reaching 3 percent next year
and as much as 3.8 percent in 2014. This compares to previous
estimates of 2.8 percent and 3.5 percent, respectively.
With the full assurance of further policy accommodation from
Bernanke and the FOMC, investors bought stocks and commodities
throughout the afternoon. Long-term Treasuries pared their gains in
the wake of the FOMC announcement and ended the day lower. The SPDR
S&P 500 ETF (NYSE:
) jumped 1.52 percent and closed the session at $146.59.
Unsurprisingly, volume was heavier than normal with around 196
million SPY shares trading hands compared to a 3-month daily
average of 128 million.
The PowerShares QQQ Trust ETF (NASDAQ:
), which tracks the performance of the Nasdaq 100, climbed 1.35
percent to finish at $69.56. The QQQ has now added nearly 25
percent in 2012, and is sitting at a new 52-week high.
Crude oil also rose on the session. NYMEX crude futures were
last trading up a little better than 1 percent at $98.00 in the
electronic GLOBEX session.
Gold futures were very active in the wake of the FOMC
announcement, and were last up around 2 percent to $1,769.00. Most
of the day's gains came in the wake of the QE3 announcement, when
the precious metal surged on heavy volume. The SPDR Gold Trust ETF
) ended the day with a 2 percent gain at $171.31.
The iShares Barclays 20+ Year Treasury Bond ETF (NYSE:
) traded up for the first half of the trading day, but fell after
the FOMC announcement, closing down 0.39 percent at $121.53. The
yield on the 10-Year Note fell 3.8 basis points to 1.72 percent
despite the sell-off in longer-dated U.S. debt.
The U.S. Dollar fell on Thursday, as investors dumped greenbacks
after learning that the Fed would be engaging in more money
printing through QE3. The PowerShares DB US Dollar Index Bullish
), which tracks the performance of the dollar versus a basket of
foreign currencies, closed the session down 0.64 percent at
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