Today marks the second time this year that the Federal Open Market Committee (Fed) will announce its decision on interest rates. On the surface the meeting looks to be somewhat boring: With jobs showing some strength and gas prices getting dangerously close to $4 a gallon, few analysts are expecting the Federal Reserve to announce a new quantitative easing program. At the last Fed meeting in January, Ben Bernanke and his colleagues did surprise the market with language about economic conditions being “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Since the Fed made that statement, many analysts and pundits continue to expect bond yield levels to stay contained, given that the Federal Reserve has assured us of being the primary anchor to the term structure of rates.
Tuesday served as quite a jolt to investors. The S&P 500 lost -1.5%, its biggest drop since last December. It seems that everyone had gotten quite used to the gentle drift higher that characterized the stock market so far this year, since there hadn’t been so much as a 1% correction in the S&P since the end of last year.
Stocks are on quite a roll as 2012 gets underway. The S&P 500 is up more than 5% already — it’s on an annualized pace of 130% — which is its best start since 1997, according to Bloomberg. And stocks received a further lift yesterday afternoon following the latest Federal Reserve meeting. The Fed extended its pledge to keep short-term rates at record low levels for a year and a half longer than previously promised (late 2014 instead of mid-2013). In addition, in his Q&A with reporters after the meeting, Chairman Bernanke said that more quantitative easing (QE) is “an option that is certainly on the table.”