The Federal Reserve announced that it was doing nothing new after its March 13 meeting -- and the stock market jumped for joy.
This might not be as silly as it seems. In fact, it might mark a turning point at which optimism from investors about actual economic developments replaces dependence on the Fed for reassurance.
Federal funds rate
In the press statement that followed the Federal Open Market Committee (FOMC) meeting, the Fed had some fairly rosy things to say about the economy, but no new initiatives to announce.
In terms of economic outlook, the Fed noted that signs of growth have been encouraging lately, and that labor conditions have improved as a result. The Fed's comments were dismissive of the threat from higher oil and gas prices, saying they would affect inflation only temporarily.
In terms of interest rate policy, the Fed announced no changes. It noted that the Fed funds rate would remain between 0 and 0.25 percent, and reiterated that it was likely to maintain this exceptionally low interest rate stance through late 2014. The Fed also noted that it was continuing as planned with Operation Twist, which essentially represents a shift of bond holdings toward longer maturities, in an attempt to drive long-term interest rates down.
It should be noted that the absence of new initiatives does not mean the Fed is doing nothing. The low fed funds rate, the long-term commitment to that rate and Operation Twist are all fairly extraordinary measures that remain in place.
Economic context and market reaction
There have been times when an FOMC meeting without new policy initiatives would have sent the stock market into a sulk. Lacking much positive economic news over the past year, the market had become dependent on the Fed for signs of hope.
The context now is that there has been a string of positive economic developments. Just in the past couple of weeks, the estimate for fourth quarter 2011 GDP growth was revised upward, and the February jobs report continued a recent trend of solid employment growth.
These positive developments probably helped give the Fed confidence that it didn't need any new announcements at this FOMC meeting, but perhaps more importantly, they gave investors something more substantial than Fed-watching to pin their hopes on. This is just as well. The stock market had become a little too addicted to lower-interest-rate initiatives, when realistically, how much lower can interest rates go?
Ultimately, the point is for low interest rates to drive economic growth, rather than for rates to simply get lower for their own sake. The economic news lately has been strong enough for the Fed to refrain from any new tweaks to interest rates, and for investors to focus on growth rather than on the Fed.
In short, the Fed had nothing substantive to say as a result of the March 13 meeting, and in this context, silence is golden.