Is the Fed's Operation Twist Just the Start of More Stimulus?

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The Federal Open Market Committee (FOMC) ended its two-day policy meeting Wednesday announcing an extension of Operation Twist, the policy of swapping short-term Treasury securities in its reserve for bonds with a longer maturity.

The program, set to expire June 30, will now continue until year's end. During the next few months the Fed plans to buy some $267 billion worth of bonds.

In a press conference after the meeting, Federal Reserve Chairman Ben Bernanke indicated the Fed sees weaker times ahead. Its outlook has changed, and not for the better.

It was not what investors wanted or needed to hear.

U.S. stocks fell following the announcement. Many market participants, especially precious metals traders, were hoping for a more aggressive Fed maneuver, like a third round of quantitative easing.

"Traders don't want to hear maybe," Quincy Krosby, market strategist with Prudential Financial, told CNNMoney. "And this is a trader's market."

The news rattled markets initially. But all three indexes bounced off their intraday lows and managed to finish the rocky day nearly unchanged.

Gold, off some $25 an ounce immediately after the announcement, had a volatile day. The yellow metal fell to a low of $1,589.20, peaked at $1,622.20, and finished the day off $11.10 at $1,607.80 an ounce.

Bernanke stressed that the central bank is prepared to step-in and step-up when and if necessary – hinting that Operation Twist could just be a precursor to still more stimulus measures later this year.

Operation Twist a First Step?

One catalyst for more Fed action would be continued weakness in the U.S. unemployment situation.

University of Pennsylvania economist Justin Wolfers tweeted, "I read the Fed as saying: One more bad jobs report and we'll do more."

The Fed raised its forecast for the unemployment rate, projecting the level will finish out 2012 between its current unhealthy 8.2% on the high end, and 8% on the low.

Bernanke acknowledged the Fed will keep a keen eye on the labor market, and will act if hiring continues to slow. However, he did hint that the Fed would not react with another extension of Operation Twist.

"We are unlikely to do more maturity extension," Bernanke said, adding that the Fed would take "other types of steps in order to add to the amount of stimulus in the economy."

In other words, QE3 may not be out of the question.

In a note to clients, Ian Shepherdson, chief U.S. economist for High Frequency Economics wrote, "Mr. Bernanke's press conference surely left few doubts that the Fed will take more aggressive action and renew QE if the economy fails to perform as they expect."

The Fed also lowered its forecast for 2012 economic growth to a range of 1.9%-2.4%. Just two months ago, the outlook was more robust — between 2.4% and 2.9%.

The Fed left interest rates near zero, a level where they have lingered since 2008, and reiterated they will stay "exceptionally low" through 2014. Some were hoping for an even longer projection.

Bernanke continuing his dismal economic view warning that Europe's financial woes, and the ambiguity surrounding the "fiscal cliff" (the simultaneous onset of tax increases and spending cuts set for Jan. 1, 2013, unless Congress intervenes), could certainly put the brakes on or dent America's economic growth.

Another dose of Operation Twist – and a weaker one at that — hardly looks capable of beating back such economic headwinds.

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  1. MCCORMICK45309 | June 21, 2012

    Where banks are reluctant to lend and buyers are reluctant to buy single family homes all while the banks are sitting on near record supplies of in stock inventory, how does Operation Twist 2 do anything to increase commercial development to improve the job outlook and how does this nominal move do anything to stimulate housing? Rents continue to rise while employers fail to see sufficient end demand to hire all in the face of the fiscal cliff and an upcoming Presidential election which insures that nothing is done on the fiscal side by Congress until after the next House and Senate take office. We all now can see that monetary policy alone cannot change the economy when its only real weapon is interest rates. We are back to the FED pushing on a string which does not move the economy forward nor increase employment or raise consumer confidence or meaningfully help the housing market.

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