When it was announced, the Fed's Maturity Extension Program was hailed as stimulus.
It is not, and the current slowdown in economic activity is proof.
Everyone from the Financial Times, the Guardian, and the Fed asserted that flattening the yield curve will stimulate the economy. Read below.
It did not. Neither theory nor facts supports this conclusion. The Fed now has to do something else if it wants to juice the economy.
Only an increase in the monetary base will have any stimulating effect.
The two charts below demonstrate the effects of the different policies and the timing.
Notice that Fed action precedes each of the strong upward legs of the stock market, except for the recent curve flattening exercise.
The stock market knows that curve flattening is not expansionary, but recessionary.
The reasoning is simple. Banks have less incentive to make long term loans in this environment. They make less money lending long and borrowing short.
There is always the possibility the Fed will do nothing.
If so, the economy will bump along until the housing disaster is resolved, in a few years, until business conditions stabilize in Europe and China, and until the jobs market in the US starts growing again.
But, if they do, Bernanke will be out of a job, as will the occupant of the White House.
My bet is for additional asset purchases, as soon as this current program ends. The Fed sees the truth and will move swiftly.
* * * * * J B K * * * * *
San Francisco
FRB: What is the Federal Reserve's maturity extension program (referred to by some as "operation twist") and what is its purpose?
Under the maturity extension program, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve's portfolio.
By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities.
The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.
http://www.federalreserve.gov/faqs/money_15070.htm Fed launches $400bn ‘Operation Twist’Such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical.
The purchases will run until June 2012. “Operation Twist” means that the Fed will increase the average maturity of its assets but, unlike its previous rounds of quantitative easing, the Fed will not expand the overall size of its balance sheet. Economists estimate that a twist of $400bn could have a similar effect on interest rates to the $600bn QE2 programme of outright asset purchases that the Fed launched last November.
http://www.ft.com/intl/cms/s/0/3deaf5fc-e478-11e0-92a3-00144feabdc0.html The Guardian asks, Does it work?
It works in the sense that it is perfectly possible to sell short-dated bonds and buy the long-dated variety and in the process change the make-up of the Fed's bond portfolio. Beyond that, the picture is murkier.
http://www.guardian.co.uk/business/2011/sep/21/operation-twist-federal-resrve...
New Orders. New orders for manufactured durable goods in April increased $0.3 billion or 0.2 percent to $215.5 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 3.7 percent March decrease. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders increased 1.2 percent. Transportation equipment, also up two of the last three months, had the largest increase, $1.3 billion or 2.1 percent to $62.2 billion. This was due to motor vehicles and parts, which increased $2.3 billion.
