Market Looking Forward to Operation Twist But What About Europe?
“Operation Twist” and/or additional easing could mitigate European contagion effects.
The Federal Reserve will begin a special two day session this week with the intent of finding new ways to help the U.S. economy grow. The market is expecting some easing measures but not necessarily another QE2 although some form of monetary policy is expected that will help the economy expand. The Federal Reserve is expected to implement a new tool called “Operation Twist” which involves the Fed buying maturities to help keep interest rates low.
In essence, market participants expect more asset buying from the Fed. Market participants disagree on which maturities the Fed will focus on and how much the central bank needs to purchase. We are expecting something unique and look forward to the statement to evaluate what the next move from the Fed might be. Calls for another round of easing may become popular if Greece defaults and Europe continues to falter which may lead to QE3 and negate possible contagion effects. Some argue the Fed should have already begun QE3 with numbers around $500 billion but this may face some political backlash. In August we believed QE3 was completely off the table – perhaps it isn’t.