The Fed: Let's Twist Again

The Federal Reserve's message today was: Let's Twist Again, Like We Did Last Summer.

The market wanted more of a QE3 Shotgun approach. When the Fed announced its modest extension of the Twist, the market gyrated, doing the Locomotion, and ending slightly down. Perhaps the Fed thought the market would say I Thank You. But no such luck, not from Wall Street. If you took losses today, you can Cry If You Want To. You might feel better if you go Downtown.

But don't worry. The Fed said that it Heard Through the Grapevine that the economy might be slowing, and that the market should Hold On, I'm Coming, because it's prepared to launch QE3 if necessary.

The market has blithely ignored negative economic data over the past week and has rallied in the hope of Fed accommodation. Just as When A Man Loves A Woman, the market can't keep its mind on nothing else. Market players hung on every word of current and former members of the Fed Open Market Committee, even asking Please, Mr. Postman for news of impending government intervention. The market Ain't Too Proud To Beg for more money printing. The Fed knows this, and if the economic clouds darken, it will roll out QE3, hoping to spur Dancing in the Street and push market averages Higher and Higher.

But QE3, compared to earlier QE's, has less potential for effectiveness and greater possibility of negative side effects like inflation. If the Fed's accommodation goes haywire, we could have a Heat Wave and meltdown in the financial markets. Of course, with the EU crisis far from over (and perhaps getting worse), and the U.S. economy slowing, the Fed may have little choice but to take that risk. Today's financial markets have no tolerance for any downturns exceeding 2%, expecting instead to Rock Around the Clock. The markets are all government, all the time. So, it might not be a bad idea to Say A Little Prayer.