FOMC Stabilized Inflation Expectations Yesterday and the Stock Market Soared

After the FOMC issued its statement yesterday, the S&P which had been down almost 2 percent rose about 6 percent to close up for the day by about 4 percent.  Presumably, this allayed fears that the Fed would passively allow inflation and NGDP to keep falling.  For the day, the TIPS spread depending on which measure you look at was constant or rose slightly.  However, the yield on Treasuries dropped by 20 basis points on both the 5- and 10-year bonds.  So the real yield dropped by 20 basis points or so, which says that profit expectations are falling or perceived uncertainty is rising.  Nevertheless, the mild and not very helpful statement was at least able to stop the bleeding.  NPR says that Dow futures are down 1 percent before the market opens in a half an hour.  I am not at all sure that the FOMC statement will be enough to turn the tide.  But I also thought that Bernanke’s Jackson Hole speech last August would not do the trick, and it in fact did succeed in turning things around (for a while).  Hold on to your hats.

PS  Does anyone know by how much the yields on the 5- and 10-year Treasuries and TIPS changed after the FOMC press release?


15 Responses to “FOMC Stabilized Inflation Expectations Yesterday and the Stock Market Soared”

  1. 1 John Hall August 10, 2011 at 6:58 am

    Bloomberg is showing a steady decline in 10-year Treasury yields from around 2.325% before the announcement to a brief low between 2.05% and 2.15% before rising to slightly above 2.25% at 4pm.

    For 10-year TIPs, I see yields around 0.06% before the announcement. Falling to lows of around -0.125% to -0.025% briefly before rising to close the day (4pm) around 0.4%.


  2. 2 John Hall August 10, 2011 at 6:59 am

    I think I meant 0.04% at 4pm in the last sentence.


  3. 3 jamesoswald August 10, 2011 at 8:38 am

    This is a useful site:

    It isn’t as up to the minute as Bloomberg, but it’s official.


  4. 4 Luis H Arroyo August 10, 2011 at 9:30 am

    David, i think it is not sufficient. The interest rate of private and public bonds is very low, but the distance between them is higher than normal (See my graph in me blog). That, for me, means a huge liquidity preference, correlated with the low non residential investment .The extremly low real (YIP) intereste seems to corroborate that. I think that more decission of FOMC would be necessary.


  5. 5 Mark C August 10, 2011 at 9:32 am

    hi David,

    I don’t know bout the stock market, perhaps it’s a sigh of relief that though there’s no QE3, at least the Fed seemed to be aware of the seriousness of the situation and would act to keep the economy from going into another recession.

    But if you look at the bond market, the signal was much clearer. Earlier yesterday, when news on Ken Rogoff saying the Fed might do something ‘drastic’ popped up, UST 10yr yield shot up 10 bps to as high as 2.43% and maintained at around that level until FOMC came out with their statement, then ‘bang’ 10yr dropped all the way down to around 2.03% and later closed at 2.25%, 15 bps lower than 2.40%. The bond market was clearly dissapointed (or should I say delighted? since yields going lower would mean profit for bond investors).

    I made this comment on Scott’s blog, sorry for the copy and paste, I’ll come back to you on the TIPS BE, but it seems like they remain relatively stable.


  6. 6 Luis H Arroyo August 10, 2011 at 9:33 am

    Yes, hold on to your hats.


  7. 7 JP Koning August 10, 2011 at 9:48 am

    Hi David, the Dow fell about 300 points, or 3%, in the half hour after the 14:15PM announcement, only bottoming at 14:46 or so. Only then did the end of day rally start. Which was the true reaction to the Fed news, to original 30 minute decline or the much later rally?


  8. 8 Benjamin Cole August 10, 2011 at 12:08 pm

    CNN calls Bernanke a quitter—

    Bernanke has thrown in towel on economy

    By Paul R. La Monica @CNNMoney August 10, 2011: 1:43 PM ET

    NEW YORK (CNNMoney) — Is the Federal Reserve waving the white surrender flag? It sure looks that way.
    The Fed made the unusual (and unprecedented) move on Tuesday to tell the market in plain English that it intends to keep rates near zero for the next two years!

    That is disappointing on many levels. First and foremost, it is a crystal clear sign from Ben Bernanke and other Fed members that they think the economic recovery (if one could still call it that) will remain tepid for a long time.
    That is probably one of the reasons that the post-Fed euphoria on Tuesday afternoon on Wall Street quickly gave way to despair again on Wednesday.
    This is not good. The Great Recession may have technically ended in June 2009. But for many Americans, this current malaise is just an extension of the problems that first began to surface in 2007. Lost Decade anyone?
    Yes, that’s a Japan reference. And it’s sadly apt. The Fed, by pledging to leave short-term rates “exceptionally low” for what will eventually amount to a four-and-a-half-year stretch, is essentially guaranteeing that long-term bond rates will remain persistently low — just like in Japan.


  9. 9 Luis H Arroyo August 10, 2011 at 12:15 pm

    I don´t see americans with the resignation of japanese…


  10. 10 Benjamin Cole August 10, 2011 at 1:28 pm


    We have something worse. We have a growing group that aggressively worships money–not wealth, not greed, but actual money and gold, with a moral fervor. The exchange rate of money is regarded in ethical terms. They think of gold as wealth, not productive assets, innovation, investment or labor.

    They speak of inflation as “debasing” the currency, and ask what will a nation do next, if it debases its own currency? Sell our daughters into white slavery?

    And they hate the federal government, and Obama, and conflate NGDP targeting with the federal interventionism of the worst bureaucrats and liberals.

    It is a dark time for the USA.


  11. 11 Luis H Arroyo August 10, 2011 at 2:49 pm

    Yes, Benjamin, I agree; but you must understand me. US are my last hope. Europe is worse. If america falls, Europe would be finished.
    A double dip today could be perhaps so serious as 1929 great depression.
    I never thought that a few republicans “patriots” could make so much evil.


  12. 12 Benjamin Cole August 10, 2011 at 3:20 pm

    You want to crap in your pants?

    Take a look at page c8 today in the WSJ. CMBS down to 60 from 90 cents on the dollar, USA average, from start of this year.

    Commercial loans going bust? Too? Now?

    Please oh Gods of Lucre, inflame the heart of Ben Bernanke-san with inflationary lust and carnal desires for prosperity!

    Luis, life is short, so go short.


  13. 14 Morgan Warstler (@morganwarstler) August 10, 2011 at 9:40 pm

    Luis, have faith – the left is going to bend, bend, bend, bend…

    The most important thing is forcing the structural changes that result in government in submission:

    less regulations
    productivity gains annually over 2.5% in the public sector
    ending public employee unions

    All of this means… IF you want to have new roads, you have to pay rock bottom prices to get them built, that means paying less, getting more, not needing much by way of approval.

    The crisis here is GOVERNMENT – if it wants to survive it must learn to adapt and update itself as aggressively as any modern information or service company.

    At the low end, like WalMart
    At the check cutting side, like Paypal
    At the buying side like Ebay
    At the education side like Khan Academy

    When progressives look at tax revenues and JUDGE THEMSELVES MORALLY based on the % that doesn’t go to public employees – they will finally gain some traction.

    This is healthy. Enjoy it.


  14. 15 David Glasner August 11, 2011 at 10:04 am

    Sorry for taking so long to respond, but things have been pretty busy of late.

    John, Thanks for your prompt reply. At this point, I can’t remember what I was thinking of when I asked for that information.

    James, Thanks for the link. I just found the site myself a few days before you sent it to me. I no longer have to put up with a one day lag on the St. Louis Fed website.

    Luis, Perhaps today things are starting to sort themselves out. Part of the problem, as I think Scott suggested on his blog, is that the markets have been perplexed by the FOMC statement. Perhaps that’s why inflation expectations seem to have been fluctuating violently the past few days. In addition, according to the Cleveland Fed’s model of inferring inflation expectations from the TIPS spread, one also has to take into account the risk associated with buying TIPS because actual inflation may not equal expected inflation. Since uncertainty about future inflation has been rising, the TIPS spread has been rising which could falsely be interpreted as an increase in inflation expectations when it really means that inflation expectations are becoming more uncertain. We can’t tell what the FOMC is up to.

    Mark, Your observations seem pretty much on target and are consistent I think with what I just wrote in reply to Luis

    JP, Again further evidence that the FOMC simply added to uncertainty and, to that extent, made things worse.

    Benjamin, I agree that the FOMC statement not only was hard to make sense of, but added to a general feeling of pessimism and despair as I noted in today posting. On the obsession with currency debasement that is now the mantra (to use the WSJ phrase) of right-wing opposition to using monetary policy, see the wonderful essay by one our esteemed commenters Lorenzo from Oz on the skeptical lawyer blog. Thanks for the reference to the WSJ about CMBS.

    Morgan, I think that we all have to reconsider our past positions and be prepared to subject ourselves to a higher standard of performance. There is usually a silver lining in any crisis, that doesn’t make it enjoyable.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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