Wall Street sinks after Fed statement cites "risks" (Fed's $400B "Operation Twist" Worries Market)

Real Clear Markets ^ | 09/21/2011 | Chuck Mikolajczak

[SeekAndFind]

Stocks tumbled on Wednesday after the Federal Reserve said there were "significant downside risks" to the economy even as it took another stab at boosting growth.

The Fed, as expected, said it would buy more long-term Treasury securities in an effort to lower borrowing rates. But investors worry the Fed's latest plan will have little effect on lending in an economy that appears to be stagnating.

The Fed's $400 billion plan, dubbed "Operation Twist" by market participants, is the latest in a series of steps aimed at reviving an economy that has struggled to rebound from the 2008 financial crisis. Investors are less optimistic after previous efforts, particularly in light of the Fed's own statement pointing to economic risks.

"That was probably the biggest statement when he said 'significant downside risks,'" said Alan Valdes, director of floor operations for DME Securities in New York. "Considering we've done over $1 trillion, and it hasn't moved the needle at all."

SNIP

The Fed said it would launch a $400 billion program that will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to buy longer-dated Treasuries.

The Fed said economic growth remains slow, and recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.

Operation Twist, the Federal Reserve's latest move to stimulate credit for consumers and businesses, could threaten the earnings of some of the country's largest insurers for years to come.

[SeekAndFind]

A short explanation of OPERATION TWIST:

http://www.cnbc.com/id/44612678

The Federal Reserve says it will sell $400 billion of its shorter-term securities to buy longer-term holdings, its latest effort to boost a weak economy.

The Fed’s move to rebalance its $2.87 trillion portfolio—a version of the widely expected “Operation Twist”—could lower Treasury yields further. Ultimately, it might reduce rates on mortgages and other consumer and business loans.

Fed policymakers announced the move on Wednesday after a two-day meeting. Three members dissented from the decision.

Many analysts have said the shift in the Fed’s portfolio could provide modest help to the economy by reducing borrowing costs and perhaps raising stock prices. Others say it won’t help and warn that the move could escalate inflation .

In June, the Fed completed a $600 billion bond-buying program that may have helped keep rates low. Stocks fell immediately after the announcement. The yield on the 10-year Treasury note tumbled, and its price rose.

Expectations that the Fed would expand its holdings of long-term securities, along with fears of another recession , have led investors to buy up U.S. Treasurys. Treasury yields have dropped in response.

Once the Fed announced last month that it would expand its September policy meeting from one to two days, economists have anticipated some new action from the Fed. Chairman Ben Bernanke had said the Fed was considering a range of options.

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[laconic]

I don’t care how low interest rates are pushed down to (artifically, by the Federal Reserve). Why would you borrow money and take on commensurate debt to expand in a recession, to commit to hire more employees when a health insurance scheme no one understands kicks in next year or to invest it elsewhere for a better return when none is available?

[Rapscallion]

Some sites around the internet say that the democrats caused the recession to hurt Bush and help Obama get elected. I have no idea whether the allegation is true but there are several suspicious aspects to the recession that has now turned into a real depression with Obama (and Soros) at the helm. Some of us, I included, believe Obama literally meant what he said about transforming America into a lesser power and redistributing its wealth. In that regard he must consider his presidency a success.

Now we are calmly considering $430 billion more added to our already crushing debt.

At what point will we send the Kenyan on his way to some country that has already been ruined? Preferably one that has an extradition treaty with the US.

We have to get him out of here soon and begin undoing the damage and start the national rebuilding.