Forget Hollywood- the drama was in Washington D. C. on Wednesday- a big plot twist- the U. S central bank decided not to cut back on its $85 billion dollar bond buying program.
Fed Chairman Ben Bernanke and his cast of Fed governors essentially saying- they were wrong- and the economy just isn't strong enough yet- even taking down their economic outlook.
SOUNDBITE: BEN BERNANKE, CHAIRMAN, U. S. FEDERAL RESERVE (ENGLISH) SAYING:
"We have been over-optimistic about out-year growth. The potential rate of growth of the economy has been slowed, perhaps because new businesses are not being formed at the same rate, innovation may not be translated into new technologies at the same rate, investment is slower etc. So it appears again the potential rate of the economy has been slowed somewhat, at least temporarily, by the, by the recession and the financial crisis, and you can see that in the slower productivity figures."
The move was applauded by the markets- sending the Dow and the S&P 500 to record highs.
But many economists gave the move bad reviews- saying they didn't like the way the Fed went about communicating its intentions- and then seeming to do a major rewrite.
Moody's John Lonski:
SOUNDBITE: JOHN LONSKI, CHIEF CAPITAL MARKETS ECONOMIST, MOODY'S ANALYTICS (ENGLISH) SAYING:
"In this case, the communication strategy failed. It did not give the financial markets a clear indication of where Fed policy was headed and as a result we had not only higher 10 year treasury bond yields than otherwise, we also had higher mortgage yields than otherwise. And this latest run up in mortgage yields has apparently done significant damage to housing's recovery. "
And in fact, the Fed pointed to the higher mortgage rates as a key concern.
So now what?
Eaton Vance's Eric Stein:
SOUNDBITE: ERIC STEIN, PORTFOLIO MANAGER, EATON VANCE (ENGLISH) SAYING:
'I think it's going to be increasingly challenging for the Fed. My first reaction I'd say - before the statement came out there was a lot of volatility over the past couple of months, tapering was priced in. If they did a tapering light combined with the fact that Summers is not going to be head of the Fed, volatility may fall. But now you may see volatility increase because we haven't done that first step of tapering yet."
The Fed's next meeting is at the end of October.