The markets are quivering in anticipation of what the Federal Reserve may or may not announce later today. The consensus is that it will decide on implementing “Operation Twist.” In this situation, the Fed would maintain short-term rates while reaching out to lower long-term rates, effectively “twisting” the yield curve. The idea is that lowering long-term rates will encourage borrowing, spending, and investment.
However, lack of money, credit, or liquidity doesn’t seem to be the problem. The fact is that 10 year Treasury yields are already below 2% and near historical lows. It seems doubtful that lowering rates further will do much to improve economic conditions. Indeed, Bloomberg reports that 61% of surveyed economists do not believe the action will lower the 9.1% unemployment rate.
So why engage in the operation at all? Well, the Fed is running out of options. With short-term rates basically at zero and congressional outcry against more QE, Uncle Bernanke is in a real pickle. At this point, I think he’s twisting, shouting, and throwing anything he has left at the rising wall of economic worry.
Victor K. Lai, CFA
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