Fed Extends “Operation Twist” Until The End Of 2012, Lowers Economic Outlook:
FOMC June 2012 meeting goes largely as expected.
In attempts to put downward pressure on longer term interest rates, the Federal Reserve Bank announced today that they were extending “Operation Twist” based on Europe weakness, tight credit and slow growth in the labor markets. Household spending is rising at a slower pace than earlier this year and unemployment at 8.2 percent remains “elevated”.
Bernanke stated, “FOMC participants see slower progress in reducing unemployment than they did in April” (2012), Most participants see the risks toward lower growth and higher unemployment.
The Fed admitted it was too optimistic earlier (as we were in January 2012) and sees strong headwinds that are keeping the economy from growing. The Federal Reserve is right on the mark. We believed the Fed could have made this statement earlier if they were monitoring the same jobs numbers we have been looking at carefully and gave less weighting to ancillary economic data. Operation Twist was largely expected by most market participants and stocks fell quickly after the news was announced but then rose minutes later after the headlines were fully digested. At 3:15 stocks were slightly lower after the Ben Bernanke’s news conference.
For the most part the Fed seems to be catching up to economic forecasts such as ours that showed less resilience in the economy. We lowered our economic outlook on May 10, 2012 2012 expecting lower GDP and perhaps no unemployment changes this year.
Each quantitative easing program and Operation Twist has resulted in subsequent increases in wealth effects after enacted. We believe the current extension of Operation Twist will extend the Bernanke Put for an intermediate period. This makes us bullish on the equities medium term. Essentially, we won’t be fighting the Fed, this approach has never worked.