Economy Watch: Fed To Market: Calm Down

The Federal Open Market Committee's (FOMC) statement on Tuesday, which much of the investing world had been anticipating (between moments of headless-chicken panic), started off bland enough, per Federal Reserve custom.

The Federal Open Market Committee’s (FOMC) statement on Tuesday, which much of the investing world had been anticipating (between moments of headless-chicken panic), started off bland enough, per Federal Reserve custom. “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected,” the statement started.

In other worlds, the FOMC has been paying attention to the news. The FOMC also admitted that the “temporary factors” that it liked to cite in pervious statements this year as the cause of most economic headaches–such as the aftermath of the disaster in Japan and the high price of gas–might be a little less important than the Fed previously asserted. Something more fundamental might be wrong with the economy.

Eventually, though, the FOMC dropped the bomb. “The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate, at least through mid-2013.” The non-foggy precision of that promise is almost unheard of in the annals of the Federal Reserve, which has consistently said that interest rates needed to remain low for “an extended period.”

Reaction to the Fed

Wall Street didn’t exactly calm down on word of the Fed’s unheard-of two-year promise on low interest rates. Instead, it took a U-turn.

Actually, the equities markets had been gaining ground for most of the day–really gaining, up near 3 percent–when everything took a tumble in the afternoon. After the FOMC made its statement, investors rushed to get their buy orders in once again. In the end, the Dow Jones Industrial Average was up 429.92 points, or 3.98 percent, while the S&P 500 gained 4.74 percent and the Nasdaq advanced 5.29 percent. That wasn’t quite enough to make up for Monday’s losses, much less the losses since mid-July, but it was something.

The question now is whether the equities roller coaster will continue for the rest of the week or longer. Also, whether the Fed might undertake a little more bond-buying, which would inevitably be called QE3. The FOMC didn’t mention any such plans in Tuesday’s statement, but didn’t rule the move out either.

Productivity takes a drop

Meanwhile, other economic indicators kept coming. The Bureau of Labor Statistics reported that U.S. labor productivity dropped at an annualized rate of 0.3 percent during the second quarter of 2011. Output and hours worked rose at an annualized 1.8 percent and 2 percent, respectively, for the quarter.

Over the last four quarters ending during the first quarter of this year, manufacturing productivity had increased 2.3 percent as U.S. manufacturers strove to fill orders from all over the world, but during 2Q11, manufacturing sector productivity fell 2 percent, the BLS also reported. Labor costs in manufacturing increased 4.4 percent in the second quarter, but were unchanged over the four quarters before that.

Unsurprisingly, the National Federation of Independent Business’s monthly Small-Business Optimism Index fell, dropping 0.9 points in July—a larger decline than in each of the previous three months—which brought the index down to 89.9. Since it was a July survey, dim expectations for future sales growth and improved business conditions were the major contributors to the decline. Next month, however, the index will reflect August goings-on, such as the debt-ceiling quarrel and the ratings downgrade, so all bets are off on small-business confidence.

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