Operation Twist Unravels Markets- Dow Jones Dips Below 11,000:
Asian and European markets fall but…does the Fed see something we don’t?
Stocks reacted negatively in the last hour of trading to news from the Fed that they would not change interest rates and would implement a new tool called ‘Operation Twist’. The name isn’t a brand manager’s dream but the idea is extremely sound- if it works. Essentially another QE but by a different name, the Fed is adding to it’s balance sheet with longer dated maturities to help keep short dated maturity interest rates low. Our estimate was that the Fed would soon add about $500 billion to its ledger and we were slightly off by $100 billion.
The Federal Reserve Bank has lost some friends politically for going ahead with ‘Operation Twist’ and some business execs have questioned the efficacy of the program. Chairman Bernanke is well versed on the Great Depression and doesn’t want the current Great Recession to become an insurmountable growth issue- even if that were to mean aggressively raising rates later if the economy turns around or dumping maturities. The high rate of joblessness and low consumer activity doesn’t bode well for those who feel the Fed should have done nothing. If the economy continues to lose steam and asset prices fall further- , the new question will not be related to whether Operation Twist was a good idea- instead market participants will ask- “did the Fed know something we didn’t?”
By 1:00 pm EST NYC today stocks were down by over 362 points at 10,761 following through on yesterday’s losses.