Wednesday, September 21, 2011

"Operation Twist" would represent a subtle, yet important, policy shift at the Fed.



If the Fed announces Operation Twist today (selling short dated securities and buying longer dated securities) it would represent a subtle, yet important shift in Fed policy in my opinion. It would signify that the inflation hawks on the FOMC have won the debate.

Operation Twist would be policy action that doesn't entail an expansion of the Fed's balance sheet and an expansion of the Fed's balance sheet is exactly what guys like Fisher, Plosser and Kocherlakota oppose. They believe it's inflationary and that it hurts the dollar.

So Operation Twist, if it is announced, would mean that the inflation hawks on the FOMC are in control.

8 comments:

Tom Hickey said...

Could also be that they are afraid or what our Chinese masters would say?

Maybe they actually do believe that China holds the US hostage by purchasing its "debt."

Adam said...

Can you rewrite your second paragraph. I think you are missing a word.

Matt Franko said...

didnt think of that angle... but true...

What I have been looking for is any indication that the FRBNY will be willing to 'raise the bid' for the USTs this time vs the way they went about the QE2.

It will be interesting to see if the 'inflationistas' will be out there this time like they were when the QE2 was announced. Many probably put their money where their mouth was and entered speculative short positions on the USTs, and then the Fed became a large 'scale down buyer' and facilitated a big bond sell-off.

After the big rally in Treasuries that has ensued once this large scale-down buyer (Fed) has exited the marketplace (QE2 ended), I wonder if the spec shorts have any funds left to re-enter new short positions? or if they are now broke after getting burned by the recent bond rally?

to the extent that the spec shorts have been wiped out, even if the Fed uses the same MO as QE2 (refuses to raise their bid/lowers their bid) any Fed facilitated sell of in the bonds due to Twist should be more muted than that which they caused under QE2.

Bottom line: the spec shorts probably have way less firepower this time around...

Matt Franko said...

Perhaps more evidence to support Mike's observation here:

http://finance.yahoo.com/news/Fed-chairman-gets-letter-from-cnnm-3234088946.html;_ylt=ApLgDm7Docit7jCUnfF2bRW7YWsA;_ylu=X3oDMTE1bGdqOTcwBHBvcwMzBHNlYwN0b3BTdG9yaWVzBHNsawNnb3B0b2Jlcm5hbms-?x=0&sec=topStories&pos=main&asset=&ccode=

Looks like the GOP is in lock step with Fisher et al at the Fed... concerned about "inflation" and associated "uncertainty"....

They think QE is "Confidence Fairy Repellent"...

Anti said...

Mike,

You called this one very well, at least in terms of the inflation terrorists getting what they wanted(whether the terrorists realize they did is another matter).

Notice that the yield curve flattened today and obviously the indexes tanked, which means the market is not only not predicting a more rapid recovery now, but it may be predicting the Fed made things worse.

Mike Norman said...

Anti:

Yes, made it worse. Not to mention the fact that Treasury is up against the debt ceiling again and the House killed the prospect of keeping the gov't funded past Sept 30 last night. Gov't shutdown, here we come. Gov't has pretty much collapsed.

Ryan said...
This comment has been removed by the author.
Anti said...

Yeah, it looks like the language that accompanied the action may have done the damage. This was a very timid action anyway.