After much anticipation and speculation, the Federal Reserve's "Operation Twist" was announced Wednesday. This rehash of 60's Fed policies is exactly what the markets were expecting, yet the market closed down 284 points on the news.
It would appear that the market had been clinging to an unspoken hope that the Federal Reserve would outright print more money even though pretty much everyone was predicting the Federal Reserve would do exactly what the Federal Reserve did. So when those fleeting hopes were dashed, the market tanked.
While the sell-off was an interesting study in market psychology and wishful thinking, the bigger question is: Why is the Federal Reserve doing this?
According to the Federal Reserve itself:
“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” – Federal Reserve