EmailYesterday was yet another historic day in the annals of Federal Reserve history. Historic though it was, the equity market did not look impressed as it sold off in the midst of Fed Chairman Bernanke's press conference, which was confusing at times but generally disheartening throughout.
In expected fashion, the FOMC said it will buy longer-term Treasury securities, initially at a pace of $45 bln per month, after Operation Twist is completed at the end of the year. That is tantamount to a QE4 announcement, but since QE3 was left open-ended in September, it will be billed as the next stop in the Fed's "QE Infinity" program.
Call it what you will. The fact of the matter is that the Fed's balance sheet is going to be expanded in 2013 -- perhaps by as much as $1 trillion if things simply stay the same. According to the chairman, the purchases could be more or less depending on the path of the economy.
Notably, the FOMC scrapped its date-based guidance and replaced it with economic thresholds. The Fed has been talking about making this switch, so the true element of surprise was the timing of the announcement more so than the content of the announcement.
On that note, the FOMC anticipates the exceptionally low range for the federal funds rate (0% to 0.25%) will be appropriate at least as long as: (1) the unemployment rate remains above 6.5% (2) inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal, and (3) longer-term inflation expectations continue to be well anchored.
The FOMC will consider other information and will take a "balanced approach" when deciding the time is right to begin removing policy accommodation. The latter though looks to be a long way off. The chairman said the new thresholds are comparable to the prior guidance that said rates would likely remain low at least through mid-2015.
That fits with the updated central tendency economic projections from the Fed, which place the unemployment rate between 6.0% and 6.6% in 2015. The projection for 2013 GDP calls for growth of 2.3% to 3.0% versus 2.5% to 3.0% in September.
A complete update of the Fed's projections can be found here, yet the Fed's summary view of the economy, based on yesterday's action and the outlook for 2013, can be paraphrased as follows: stink, stank, stunk.
Separately, it was announced this morning that global central banks are extending temporary U.S. dollar liquidity swap arrangements and temporary bilateral liquidity swap arrangements through Feb. 1, 2014. These arrangements had been set to expire on Feb. 1, 2013.
It is a busy day of economic reporting with data on initial claims, retail sales, and producer prices. These reports were decent in aggregate, with initial claims for the week ending December 8 dropping 32,000 to 343,000 (Briefing.com consensus 375,000), retail sales increasing 0.3% in November (Briefing.com consensus 0.4%), and producer prices declining 0.8% (Briefing.com consensus -0.5%). Core PPI was up 0.1% (Briefing.com consensus 0.1%).
The summation is that the pace of layoffs has slowed, consumers continue to spend, and inflation is not a problem.
Looking specifically at the telling Retail Sales report, motor vehicle sales (+1.4%) led the November increase. Excluding autos, retail sales were flat, as expected, with a 4.0% decline in gasoline station sales serving as the main drag. Sales increases were seen in all other areas with the exception of food and beverage stores (-0.3%) and general merchandise stores (-0.9%).
Core retail sales, which exclude autos, gasoline station, and building materials sales, increased a healthy 0.5%. That follows form with the data embedded in the November employment report.
The S&P futures got a little pop on the data, but there was no follow through. The S&P futures are currently flat despite added reports that the EU and IMF finally agreed on disbursing 49.1 bln euros of aid to Greece and that a general agreement has been reached on a bank supervisory framework for the ECB.
The market's inability to rally after the Fed announcement yesterday has taken some steam out of the market, which has been in rally mode since mid-November. It is understandable given the Grinch-like message from the Fed that participants shouldn't expect a meaningful pickup in economic activity soon whether we go over the fiscal cliff or not.
