The Fed's Latest Policy Tool

The Fed unveiled its latest policy tool yesterday: words.

That's right, recall that with regard to a third round of stimulus, Bernanke & Co. had laid out two additional options if the economy gets weaker:

- The Fed could offer financial markets more clarity about how long it intends to leave interest rates at record lows, where they have stood since December 2008. For now, the Fed says only that rates will remain "exceptionally low" for an "extended period."

- It could start paying banks less interest on the excess money they park with the Fed. It doesn't pay much now - 0.25 percent. But paying even less would encourage the banks to loan the money out rather than sending it to the central bank.


So yesterday the Fed used up 50% of its remaining bullets by suggesting that it might keep rates exceptionally low until 2013.

The problem is, they've already been exceptionally low for an extended period, and no one cares. Yields are hovering at record lows. Housing is stagnant. Unemployment is high. Jobs are nowhere. And the velocity of money is near zero. Therefore it doesn't matter how long they keep rates low. Just ask Japan.

Yesterday the S&P bounced off a near-perfect 38% retracement of the move from the 1370 highs as measured from the 666 lows in 2009. That's a big level. There is work to be done to the upside now. 1204 is the next big level. This time it's resistance.

There is only one problem. As I write this just before the open, the futures are down 25 points. It therefore appears that the S&P has turned away, yet again, from a 23.6% resistance level (1165). If it can't reclaim yesterday's highs, watch out. That's a weak market that can't get up from the mat.