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Operation Twist won’t work, but makes Fed look busy

The Federal Reserve building is seen in Washington June 19, 2012. The Federal Reserve's policy-making committee again finds itself at a difficult time as it gathered on Tuesday for a two-day meeting. As Europe's banking crisis intensifies and the U.S. labor market sputters, the Fed appears increasingly likely to offer more monetary stimulus - despite political opposition, internal reticence and concerns about whether it will be effective.

YURI GRIPAS/REUTERS

The stock market doesn't know what to make of the Federal Reserve's monetary policy statement. The Fed sounded downbeat on the economy, extended its Operation Twist stimulus program (selling short-term bonds and buying longer-term securities), held off on outright bond-buying (or quantitative easing) and kept to the line that it would hold interest rates at exceptionally low levels through late 2014.

Stocks sank after the statement's release (the economy is getting worse and there's no QE3!), then rebounded shortly after (well, Operation Twist isn't so bad!). Here's what the pros make of it.

Michael Gregory, at BMO Nesbitt Burns, argues that the Fed's decision to extend Operation Twist to the end of the year bides it some valuable time: "The Fed probably decided to wait and see how the summer data pan out, before either creating more headwinds for the economy by ending 'Operation Twist' (via causing tighter financial conditions), or, flexing its balance sheet again. A couple more months of data should be sufficient to discern whether the current range-bound unemployment rate and down-drifting, sub-2 per cent PCE inflation rate are poised to rise and fall further, respectively."

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Dawn Desjardins, at Royal Bank of Canada, picked up on the shift in wording in the Fed statement when it described economic conditions: "The addition of modifiers to their growth forecast such that there will be a 'very' gradual pick up in activity and that the unemployment rate's decline will 'only' occur suggest a growing sense of unease with the Fed's base case forecasts."

Ian Shepherdson, at High Frequency Economics, believes that the Fed is simply trying to look busy amid a more downbeat assessment of the economy: "Extra Twist will do very little to boost growth, but the Fed clearly wants to be seen to be doing something."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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