As anticipated, the FOMC today announced ‘operation twist’. Their plan is a follows:
to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.
They have also decided to halt their withdrawal from credit policy, and have elected to re-invest MBS redemptions into MBS. I think this is unwise (the fed ought to leave credit allocation to the fiscal authorities) but also too small to have much impact.
Like QE2, i doubt that this is going to have a material impact on the US economy. Unlike QE2, however, i do not think that this is going to boost inflation expectations. As such, we are unlikely to get the financial fizz that occurred as the market moved to price in QE2 (starting in mid 2010).
The key problem with this package is that it is an essentially technical operation, and that ordinary people do not understand it (nor, might i add, do the many commentators).
The good thing about this step, however, is that it establishes Bernanke’s deflation fighting credibility. We now know that Bernanke has what it takes to run over the Hawks (this is two meetings in a row with three dissents) and to defy political pressure.
[Additionally, I suspect Bernanke (correctly) perceives that this is an existential moment for the Fed. A double dip could well see Monetary policy taken back by the US Treasury.]
The conclusion I draw from all this is that there will be further monetary easing. Chairman Bernanke is unlikely to be pleased with the (non)results of extending the duration of the SOMA portfolio. Thus, the ongoing weakness will eventually draw forth further action.
This next move is only likely to occur following a drop in inflation. This means that it will probably have to wait until in early 2012. That easing will probably be an increase in the size of the SOMA portfolio. It will probably also be aimed at the longer end of the US Treasury curve.
So, when is the first hike? I am rolling my call back to 2015!