As expected, the Federal Open Market Committee (FOMC) announced yesterday that it will be carrying out a program to extend the average duration of its portfolio of Treasury securities.  Specifically, it will buy $400 bln of Treasury securities by the end of June 2012 with remaining maturities of 6 to 30 years and selling a like amount of Treasury securities with remaining maturities of 3 years or less.  This is an active version of "Operation Twist," although it is a neutral policy action in the sense that the size of the Fed's balance sheet will remain unchanged.

The FOMC added, too, that it will now reinvest the principal of maturing agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  This is being done, it said, "To help support conditions in mortgage markets."

We thought the FOMC might enact a policy action to help the housing market, but that was certainly a minority viewpoint.

There were three dissents at yesterday's meeting.  In fact, the three members -- Fisher (Dallas), Kocherlakota (Minneapolis) and Plosser (Philadelphia) -- were the same members who dissented at the August 9 meeting; however, the basis for their dissent this time was different.

In August, these three members objected to providing the indication in the directive that the federal funds rate would likely remain exceptionally low at least through mid-2013.  They wanted the directive simply to say "for an extended period."  Yesterday, they dissented because they did not support policy accommodation at this time (emphasis our own).

We placed emphasis on the latter phrase, because we think it speaks to their understanding, and the general belief by the Fed, that risks remain high that things can go wrong in a number of respects and that the Fed will have to act if necessary.  In that vein, the directive noted that, "there are significant risks to the economic outlook, including strains in global financial markets."

That last statement isn't telling the market anything it didn't already know, yet the response in the wake of the FOMC decision has been decidedly negative because participants are bothered by the idea that the Fed is either becoming politicized and/or that monetary policy is ineffective given the combination of political dysfunction in Washington and the natural aftermath of a credit bubble that is forcing deleveraging.

Neither is a comforting consideration.  The discomfort of market participants is evident this morning as soft manufacturing readings out of China and the eurozone, and another weak initial claims report in the U.S., play into fears about a global recession and the inability of policymakers here and abroad to turn the economic tide.

Initial claims for the week ending Sept. 17 fell by 9,000 to 423,000 (Briefing.com consensus 418,000) while continuing claims for the week ending Sept. 10 dropped by 28,000 to 3.727 mln (Briefing.com consensus 3.730 mln).  Neither series will alter the view that the labor market is in a stalled state right now.

Sharp losses have been registered today by commodities (including oil, gold, and copper) and foreign equity markets.  Losses in Asia and Europe have generally ranged between 2.00% and 5.00% for the major averages.

The S&P futures are currently trading 3.4% below fair value, with participants nearly oblivious to the news that United Technologies (UTX) will acquire Goodrich (GR) for $16.5 bln, or $127.50 per share, in cash.  That is a 47% premium over the price GR was trading at when this potential deal was first reported last week.

"Little things" like this don't seem to matter at the moment, though, as fear and loathing about the near term have trumped any appreciation for the long-term relative value that is embedded in the equity market and which is being fortified by the Fed's efforts to hold down long-term interest rates.

We understand the cognitive dissonance knowing that many of today's stock market participants are inclined to live for the immediate gratification of their financial senses.

The near-term picture doesn't look good or sound good, but successful investing is a long-term endeavor. 

If putting money to work, one can choose today to buy a 10-year Treasury note yielding 1.76% before inflation or an equity market with a dividend yield above 2.00% and an earnings yield above 9.00%.  We favor the latter option for investment-minded individuals.  The relative value is in the equity market, even if it is hard to see (or stomach) at the moment or in the weeks ahead.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.