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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, December 12, 2012
Summary
Stocks ended nearly flat on Wednesday, giving up
most of the day's gains after Fed Chairman Ben Bernanke reiterated that
monetary policy won't be enough to offset damage from the fiscal cliff.
His comments followed the Federal Reserve's announcement of a new
stimulus plan, which briefly pushed the S&P 500 to a seven-week high. The plan, the latest attempt to boost the country's
struggling economy, will replace a more modest program set to expire
with a fresh round of Treasury purchases that will increase its balance
sheet. The program is known as "quantitative easing" or QE. In comments after the announcement, Bernanke said he
hopes that markets won't have to tank to get a fiscal cliff deal. He
"reiterated the fact that monetary policy has its hands tied as far as
addressing the seriousness of going over the fiscal cliff." Wal-Mart was the largest drag on the Dow, falling
2.8 percent to $68.94 following the Indian government's announcement of
an inquiry into the company's lobbying practices. Though the S&P 500 ended up just slightly, it was
the sixth day of gains for the index - its longest winning streak since
August. The Fed committed to monthly purchases of $45
billion in Treasuries on top of the $40 billion per month in
mortgage-backed bonds it started buying in September. It also said it
will keep its near-zero interest-rate program in place until the
unemployment rate falls to 6.5 percent from its current 7.7 percent. Negotiations over plans to avoid the fiscal cliff
intensified in Washington, but House Speaker John Boehner said on
Wednesday that "serious differences" remain with President Barack Obama
in their talks. If no agreement is reached, steep tax hikes and budget
cuts will fall into place early next year. Shares of Aetna, the third-largest U.S. health
insurer, gained 3.2 percent to $45.91, a day after the company gave a
higher forecast for profit and revenue growth in 2013. Approximately 6.58 billion shares changed hands on
the three major equity exchanges, as compared to the year-to-date
average daily closing volume of 6.52 billion shares. More from the Fed
The Federal Reserve, announcing a new round of
monetary stimulus, took the unprecedented step on Wednesday of
indicating interest rates would remain near zero until unemployment
falls to at least 6.5 percent. It was the latest in a series of
unorthodox measures taken by central banks around the world as major
economies face erratic, sub-par recoveries from the global financial
crisis and recession of 2007-2009. The Fed said it expects to hold rates steady until
its new threshold on unemployment was reached as long as inflation does
not threaten to break above 2.5 percent and inflation expectations are
contained. Fed officials, who cut their forecasts for both
economic growth and inflation next year, also replaced an expiring
stimulus program with a fresh round of Treasury debt purchases. "The committee remains concerned that, without
sufficient policy accommodation, economic growth might not be strong
enough to generate sustained improvement in labor market conditions,"
the Fed's policy-setting panel said in a statement at the close of a
two-day meeting. Fed officials committed to purchase $45 billion in
longer-term Treasuries each month on top of the $40 billion per month in
mortgage-backed bonds the U.S. central bank started buying in September.
They also repeated a pledge to keep pumping money into the economy until
the outlook for the labor market improves "substantially." The Fed will fund the new Treasury purchases with an
expansion of its $2.8 trillion balance sheet. Under the "Operation
Twist" program, the Fed bought an identical amount but paid for them
with proceeds from sales and redemptions of short-term debt. Some policymakers view actions that expand the Fed's
balance sheet as economically more potent than those that do not.
However, Fed Chairman Ben Bernanke told a news conference that the
stimulus would remain about the same, given that the central bank is
still purchasing a combined $85 billion per month in longer-term
securities. Fed policymakers voted 11-1 to back the new plan.
Jeffrey Lacker, president of the Richmond Federal Reserve Bank,
dissented, as he has at every meeting this year, expressing opposition
both to the bond buying and the new economic thresholds. The newly unveiled numerical policy guidelines
offered the most specific suggestion yet that the Fed is willing to
tolerate slightly higher inflation as it tries to juice up a moribund
economy and spur stronger job growth. A drop in the unemployment rate to 7.7 percent in
November from 7.9 percent in October was driven by workers exiting the
labor force, and therefore did not come close to satisfying the
condition the Fed has set for trimming its stimulus. In response to the financial crisis and recession,
the Fed slashed overnight rates to zero almost exactly four years ago
and bought some $2.4 trillion in mortgage and Treasury securities to
keep long-term rates down. Despite its unconventional and aggressive efforts
economic growth remains tepid. Gross domestic product grew at a 2.7
percent annual rate in the third quarter. Businesses have hunkered down,
fearful of a tightening of fiscal policy as politicians in Washington
wrangle over ways to avoid a $600 billion mix of spending reductions and
expiring tax cuts set to take hold at the start of 2013. Bernanke has warned that running over this "fiscal
cliff" would lead to a new recession. He told reporters the Fed could
ramp up its bond buying "a bit," but emphasized that monetary policy has
limits and could not fully offset the impact. By setting thresholds to help guide its decision on
when to eventually hike rates, the Fed was able to jettison a previous
prediction that borrowing costs would remain at rock bottom levels until
at least mid-2015. Officials were uncomfortable with guidance that
relied on a calendar date, and they are hopeful the new framework will
help financial markets assess incoming economic data in a way that helps
them correctly guess were monetary policy is heading. Bernanke emphasized that the central bank would look
at a range of indicators, not just the rates of unemployment and
inflation, in determining when to finally raise rates. "Reaching the thresholds will not immediately
trigger a reduction in policy accommodation," said Bernanke, adding that
the central bank would not be on "auto pilot." "No single indicator provides a complete assessment
of the state of the labor market," he said. The prior practice of fixing an end point was
criticized by some economists as sending a message that the Fed expected
the economy to be weak until then. Bernanke said the new framework was
consistent with the earlier calendar guidance, because officials do not
expect the unemployment rate to reach the 6.5 percent threshold level
until sometime in 2015. Indeed, a fresh set of economic projections from the
Fed put the jobless rate in a 6 percent to 6.6 percent range in the
fourth quarter of 2015. At the same time, the projections showed that at
no point over that forecast horizon does the central bank see inflation
topping its 2 percent target. Officials held to their assessment that they could
eventually push the jobless rate down to a 5.2 percent to 6 percent
range without sparking inflation, although Bernanke cautioned that
policy would have to start tightening before it fell so low. In its
statement, the Fed said its long-term asset purchase program would end
well before any rate hike.
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MarketView for December 12
MarketView for Wednesday, December 12