Market Reactions To Gloomy Announcement By The Fed

This article describes market reactions to the Fed's description of the US economic outlook. It is deeply concerned about the risk to the economy and it announced a new plan to keep long term interest rates down. This is primarily intended to keep mortgage interest rates low. The Fed also expressed concern about the risks in the banking system. Moody's downgraded the bonds of three of the largest banks in the US. The downgrade did not reflect any changes in their fundamentals. Moody's does not believe that it would be possible to rescue them in our current climate. In other words, they lost the implicit guarantee of government insurance against default. Of course there is also concern about the European banking system and the inability of the euro zone to solve the sovereign debt crisis that puts the euro at risk.

The takeaway from this article is that the global economy has problems that require government actions to alleviate the risk of deflation and recession. It does not appear that our elected officials have the capacity to effectively deal with these problems. Their skills reside in running election campaigns.