FOMC Meeting Flash: Bernanke Does the Twist

The Federal Reserve has just announced, after an unusual delay, that it will undertake a programme to flatten the yield curve, the famous Operation Twist, as was expected by most analysts ahead of this week's FOMC meeting.

Overview:

• Fed will buy USD 400 billion long-term securities (6-30 year), sell 400 bln short-term securities (3 year and less); average maturity will be extended.
• Fed Funds Rate stays at 0-0.25 percent, as expected. Also the pledge to keep it steady until mid-2013 was repeated.
• The Fed does not change the Interest on Excess Reserves (IOER) of 0.25 percent.
• The Fed changes its view of the economy as well, saying that "[t]here are significant downside risks to the economic outlook, including strains in global financial markets".
• The Fed also says inflation "appears to have moderated".
• The Fed sees "continuing weakness" in the labour market.
• Three dissenters (Plosser, Fisher, and Kocherlakota), they "did not support additional policy accomodation at this time".
• S&P 500 down roughly one percent immediately afterwards.
• EURUSD dives half a percent after a run-up ahead of the announcement.

Not only does Ben Bernanke signal yet again that he has no clue - or even worse no potent weapons - to combat the second round of double dip fears in little over a year. With the Fed launching Operation Twist Bernanke furthermore runs the risk of arriving too late at the party with a solution for the second time in 10 months as his QE2 programme last November came so late that the economy had long rebounded and the programme fuelled a massive commodity rally instead, which ultimately weighed on U.S. consumers in the first half of this year and forced the economy into a halt yet again.

It is time to allow the economy to heal on its own, which means going the old fashioned way. In other words, we need to rebuild capital reserves, which in turn implies that savings need to be encouraged not opposed. Sadly, there is no hope of Bernanke heeding our advice, so prepare for another Fed programme and let us hope that it is only useless and not outright harmful.