US stocks little changed, after the Fed again dances around the question of whether it will throw yet another net under the economy. They talked real smart, and danced around the issue, but ultimately didn’t really say anything new (although they came perilously close to almost saying “deflation.” But they didn’t.)
DJIA adds 7 to 10761, but S&P 500 slips 3 to 1140, Nasdaq Comp eases 6 to 2349. Stocks did rally, but gave it back by the close. You wonder what’ll happen with stocks. Have they climbed too far? Are the heights too much? I tend to think that the bulls have this thing by the tail, to mix metaphors, and aren’t about to let go. The data are (marginally) better, the central bank’s got their back, the midterms are coming up and everybody expects the business-friendly party to come back to town. ‘Course, you never know.
Treasurys and gold stick their rallies, however, while the dollar sells off. Yield on the 10-year Treasury note fell back to 2.58%, and gold jumped to $1,287. The dollar got smacked around. With the Fed ever-so-subtly threatening to debase the currency, euro jumps to $1.3240, and the yen slides to 85.05, although there’s no overt signs the Bank of Japan stepped in to defend its line in the sand.
What’s been going on the past week or so is really something to see, though. Stocks, gold, Treasurys are all rallying. It can’t last and somebody has to be wrong, but if there is, ahem, some invisible hand behind all this, it’s doing one bang-up job right now.
Anyhow, key event today was the statement coming out of the Fed’s one-day rate-setting meeting. The bankers kept rates at zero, of course. But it’s assessment of the economy wasn’t so hot, and the Fed says it’s prepared to “provide additional accommodation” if needed. While it didn’t signal the start of any new bond-buying programs, most read this as yet another incremental step toward what’s being called QE2, another massive bond-buying program to hold things together.
But it did say, in it usual circuitous way, that inflation’s too low, and if it goes much lower, the central bank will step in. The Fed’s stance raises the issue of how other central banks will react to the notion of the world’s premier central bank bashing its own currency. As our colleague Mike Casey wrote this afternoon:
The FOMC’s latest dovish statement implying further QE to fight deflation lands at an awkward time in global currency markets. The dollar is weakening on the news, but that’s not what central banks from Brazil’s to Japan’s want to see. There’s a distinctive shift toward more intervention around the world right now. Anything the Fed does to soften the dollar raises the risk of a self-destructive round of competitive devaluations. It’s yet another sign of how global imbalances are making it harder for policymakers.
“Competitive devaluations.” Keep that phrase handy.