Stocks rallied on Tuesday, as the FOMC considered what to do about lagging U.S. growth; its announcement is expected Wednesday. The market is expecting the Fed to extend “Operation Twist,” writes LPL Financial economist John Canally.
In the first incarnation of Operation Twist, the Fed sold shorter-term securities and bought long-term securities in an attempt to bring down long-term rates. As Barrons.com’s Randall Forsyth noted, it’s unclear whether that effort succeeded — although 10-year Treasury yields have since hit historic lows, that arguably has more to do with investors seeking safety as Europe melts down.
Canally doesn’t expect the Fed to announce QE3, which would entail a large asset-buying program. But to keep investors happy, the Fed will (at the very least) have to extend language indicating that it will keep rates low into 2014, Canally wrote.
“Extending the commitment to keep the Fed funds rate near zero beyond the end of 2014 is the minimum the Fed could do to keep markets placated,” Canally wrote.
On Tuesday, stocks rose in anticipation of Fed action, and on slightly more positive news out of Europe. In addition, a jump in building permits in May added to optimism about the housing market. The Dow rose 95.5 points, and the S&P 500 was up 13.2 points.
Financial stocks posted large gains, with Bank of America (BAC) ending 4.5% higher. Chesapeake Energy (CHK) led a rise in energy stocks, ending the day up 5.9%.
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