Fed Announcement Helps U.S. Stocks Rebound

At the end of June, the Fed completed its second round of quantitative easing with the purchase of $600 billion of longer-term Treasury securities. On Tuesday, the Fed said it would maintain its existing policy of reinvesting principal payments from its securities holdings. It made no mention of a third round, known as QE3.

The Fed’s announcement came a day after the U.S. stock market plummeted on economic fears following the late Friday downgrade of U.S. debt by Standard & Poor’s. But the announcement, released as regularly scheduled six weeks after the prior one, was unrelated to the S&P rating action and in fact made no mention of the downgrade. Instead, it referred to earlier negative events such as the earthquake in Japan last spring and a deterioration in overall U.S. labor market conditions in recent months.

Analysts said the Fed’s economic assessment in its Tuesday policy statement was more downbeat than earlier this year.

“The policy statement accompanying today’s no-change monetary decision included a second and deeper downgrade in the Fed’s perception of economic conditions,” wrote Guy LeBas, chief fixed-income strategist for Janney Capital Markets, in a comment on Tuesday. “Gone was the reference to ‘somewhat more slowly’ evolving growth conditions, a phrase which was replaced by “considerably slower’ growth. The statement also made reference to an outright ‘deterioration in labor market conditions,’ a factor the Fed previously cited as a reason it might move towards more accommodative policy.”