Perhaps Not the Twist the Fed Desired, Markets Plunge 3+ Percent

Yesterday the FOMC opened the third act of its grand play, “How to Fail at Monetary Policy Even When Really Trying.” James Groth framed the ridiculousness of the widely expected decision yesterday on OOC, and concluded, “continuing to experiment in the short-term with a range of policy tools is not only showing no economic benefit, but is creating huge uncertainty for individuals and businesses…”

So what did the market think about the FOMC’s Operation Twist? The Daily Ticker has the story (emphasis mine):

An extraordinary day in the financial markets ended with stocks and commodities down sharply while the dollar and U.S. Treasuries rallied, sending the yield on the 10-year note to a record low.

After trading below 10,600 intraday, the Dow closed down 391 points, or 3.5%, to 10,734 while the S&P lost 3.2%. Stocks are now on track for their worst week since October 2008, Dow Jones reports. Meanwhile, gold shed 4%, silver plummeted 11%, copper tumbled 9% and oil fell 6.7% Thursday as traders unwound “risk on” positions funded with “cheap” dollars, which rose 1% vs. the euro.

I guess to be fair to the Fed, multi-hundred point swings in the stock markets are pretty much the norm these days, but this was a particularly big day of selling. Meanwhile, if the goal of the Fed is lower long-term interest rates, the yield curve flattening strategy has started out well:

Today was another historic day for the Treasury complex as yields in all but the 30-yr tumbled to record lows on global growth fears and the European sovereign debt crisis. The 10-yr yield briefly slide below 1.70% before ending the day at a record low close of 1.715%. A gain of more than four points in the long bond was responsible for its yield plunging 25 bps to 2.786% and to its lowest level since January 2009. The 30-yr yield is now just more than 25 bps above its all-time low of 2.519%. Severe flattening of the yield curve saw the 2-10-yr spread tighten 17 bps to 150.5 to its flattest level since January 2009.

I think hedge fund manager Mark Dow summed things up best via twitter today: “Only two positions are working in this market: cash and fetal.”

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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