The FOMC said Thursday that the Fed plans to purchase roughly $400 billion in long-term debt while selling short-term Treasurys in another round of “quantitative easing,” but the Fed also signaled that the risks to the U.S. economic recovery are real and severe, and alluded to the fact that the Fed may not be able to do much more to stimulate the U.S. economy.
FOMC’s strategy to shift its holdings from short-term to longer-term bonds was called “Operation Twist,” according to CNBC commentators. The strategy was used in 1961 to boost the economy, to mixed results.
“There are significant downside risks to the economic outlook, including strains in global financial markets,” the FOMC said in a report Thursday.
“The committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.” In its report, the Fed said that full economic recovery is years, not months away—and the economy would be hard pressed to budge until there is meaningful improvement in the unemployment rate and housing market.
Stocks fell globally, with equities and commodities leading the way. The Dow Jones Industrial Average dropped 391 points, which was better than earlier in the day when losses exceeded 500 points. The broader S&P 500 Index fell 37 points, while the Nasdaq Composite Index tumbled 82 points. All three major U.S. stock indices fell by more than 3 percent Thursday.
Commodities such as gold and silver also lost value, as investors exited from their commodities positions to raise cash to cover equities losses. Gold futures dropped by almost 4 percent, while silver fell by more than 8 percent on the New York Mercantile Exchange. Other industrial commodities such as copper, as well as oil, dropped due to slowing demand from emerging markets such as China and India. An industrial report Thursday signaled that manufacturing activity in China slowed in September, hurting demand for commodities and raw materials.
The downcast mood was prevalent in other markets as well. Europe is still reeling from possible contagion of the sovereign debt crisis in Greece, as the FTSE 100 Index in London dropped by 4.7 percent, while the DAX Index in Frankfurt fell by 5 percent. Over in Asia, the Hang Seng Index in Hong Kong dropped 4.9 percent, and the Nikkei 225 Index in Tokyo shed 2.1 percent.
“We expect worsening financial conditions and continued volatility in the meantime,” said Barclays Capital’s Head of Research Larry Kantor in the company’s latest economic research paper. “We advise a neutral position toward risky assets.”
While Wall Street is being battered, gridlock continues to hamper Washington as the divide between Republicans and Democrats in Congress widens as the country’s budget is still unsettled beyond Oct. 1, and a government shutdown could loom. In addition, Republican leaders in Congress this week urged the Fed to avoid using additional quantitative easing measures.
