8/9/2011
By Brian Sozzi, Research Analyst

The stage was set for Uncle Ben to serve up some warm rice to the positive news starved markets this afternoon, but wound up shoveling on a heavy dose of cold, hard reality instead.  Major equity indices are acting very volatile in the moments immediately after, though the downdraft should not be disregarded as knee-jerk.  For as Chairman Bernanke did in fact dole out a bit of rice (left door open to further quantitative easing), it was not enough to satisfy the appetites of a hungry market yearning to put in a bottom.  Moreover, the side dish of cold, hard reality may be too much of a wakeup call for some in the markets; the words attached to the Fed's explanations on economic conditions were quite negative in tone, a sharp reversal from the last policy statement and the Chairman's press conference.  Here is how I am reading this...

Economic growth so far this year is "considerably" lower, likely due to a "deterioration in overall labor market conditions." 

Head nod to those downward GDP revisions and job creation that is running below that which is optimal to bring down the unemployment rate in a meaningful way.

Temporary factor section in first paragraph:  Bye-bye "transitory", hello the acknowledgement of embedded macro trends that are difficult to explain and particularly, have little remedy through further actions by the Fed.  Moreover, the Fed deemed it rather important to state that inflation was no longer a pressing issue.  Stagflation?

"Downside risks to the economic outlook have increased."  In addition to non-transitory factors causing a downward adjustment to near-term growth expectations, there is risk to the already weak pace of growth.  Weak near-term and uncertainty, unwelcome to an unsteady market.

Fed funds rate at "exceptionally low levels through at least mid-2013."  One word, wow. 

No date or size of would be actions that the Fed is "prepared" to undertake to be consistent with its dual mandate.

Important dates:
* Fed minutes (dissention reasons, policy actions discussed)
* Jackson Hole

Brian Sozzi
Wall Street Strategies

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