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Aug. 12, 2011, 8:11 a.m. EDT
By Brian Edmonds
NEW YORK (MarketWatch) "” It's starting to feel like déjà vu all over again.
S&P 500 by the minute over past 10 days.
Having traded through the crisis of 2008 and all the major financial crises since the 1987 crash, I thought I had seen it all. But this month "” and we are not even halfway through "” has truly been unprecedented, starting with the debt-ceiling debacle and running all the way through a very surprising FOMC decision.
On Tuesday, Chairman Bernanke and the Federal Open Market Committee (with three members dissenting) acted in response to our sputtering economy and announced a bold new policy extending a zero-percent federal funds rate until mid-2013. With this bold step, Bernanke has made it clear that this Fed will not sit idly by. By locking in low rates, the Fed has expressly made stocks more attractive, according to any equity-pricing model, and it has also helped push U.S. rates to historic lows across almost the entire yield curve.
Two-year Treasury rates are now under 0.20%. Some have described this move as quantitative easing without using the Fed's balance sheet. Treasury investors have been forced out of the curve in search of yield, and 10-year Treasury rates have fallen from 2.75% at the beginning of the month to a low yield of 2.03% earlier this week. Conceivably, this action will also force investors into risk assets in search of returns, as all Treasurys with maturities of 10 years or less offer yields below current inflation rates.
This bold move is not without risks, and it would seem that the Fed has declared that it believes this economy is very troubled. After initially rallying, the stock market has gyrated wildly, and gold has soared to record highs. Still, I applaud the Fed's move, not so much because I agree that the Fed policy will solve all, but because I believe this is a time for bold steps and real action, and Bernanke will go down in history as someone who did everything he could.
The Fed signals it plans to keep its benchmark short-term interest rate close to zero for at least another two years.
Ultimately, if the economy does not respond, the Fed will continue to do what it can by taking away interest paid on reserves held at the Fed, and possibly resume purchasing longer-term Treasurys "” in other words, "QE3." Or, it could even purchase equities or other targeted asset classes directly. The Fed might have a limited arsenal, but make no mistake: Chairman Bernanke and the FOMC will continue to act, if necessary.
Meanwhile ...
Contrast this with Capitol Hill.
We finally got a deal that raised the debt ceiling but did little to resolve our country's long-term deficit problems, and in the process we exposed fiercely divided and deeply flawed political leadership.
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