Why Biden's Staff Might Be Supremely Irritated With Obama Right Now
Who Is 'Wanda The Stuffer'? And Why Did She Get Arrested.
A Biden Spokesperson Did Not Just Say *That* to Explain Joe's Wandering Off...
Bill Maher's Father's Day Message Is Almost Perfect
New Video Montage Shows Why Most Americans Think Biden Is Too Old to...
Another Big Huge Biden Lie
Biden Admin to Announce Largest Relief Program for Millions of Illegal Immigrants
Pro-Hamas Agitators Show Up to Ted Cruz's Home for the 23rd Time
As Joe Manchin Leaves the Democratic Party, West Virginia Politics Sure Have Changed
New Bill Would Automatically Enlist Men Into the Draft
Why This Airport Is Bursting at the Seams With Illegal Immigrants
Trump Reveals the Two Democrats He Plans to Oust
Black Detroit Pastor Criticizes Biden, Obama But Thanks Trump for Coming to the...
Liberal Media Tries to Play With Fire on Trump’s Birthday, But It Doesn’t...
El Savador Illegal Immigrant Charged With Rape, Murdering a Mother of Five
OPINION

Operation Twist

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
Advertisement
Advertisement
Advertisement

The Federal Open Market Committee adopted a drawn-out Operation Twist. The same three regional Fed Presidents dissented at this meeting as did at the previous meeting – Fisher, Plosser and Kocherlakota.

Advertisement

The Fed cited more evidence of a weakening economy and global strains.  We think this, more than its portfolio rebalancing, explains the decline in equities and in bond yields following the announcement.

The FOMC decided to buy $400 billion more in 6 to 30 year Treasury bonds, but will spread the purchases through June 2012.  It will pay for them by selling Treasuries with maturities of up to 3 years.

This will shorten the effective maturity of the U.S. national debt (the maturity of the consolidated Treasury and Fed holdings).  Treasury has been gradually lengthening its issuance.  If continued, this will counteract some of the Fed’s purchases, especially since the Fed is buying slowly.

In addition, as the Fed’s mortgage backed securities mature (conventional MBS guaranteed by Fannie and Freddie), the Fed will switch to reinvesting its maturing MBS in MBS rather than Treasuries. 

We don’t think the Fed’s total assets or excess reserves will change much as a result of the announcement.   In effect, the Fed is running a leveraged SIV (structured investment vehicle), borrowing short-term at 25 basis points to finance long-term bonds yielding more.  This is very profitable for the Fed as long as interest rates stay low.  We expect the Fed to generate in excess of $100 billion in profit per year under current policies, which it turns over to the Treasury Department less expenses.  The cost is born by savers earning negative real interest rates. 

Advertisement

Implications

By expanding its purchases to mortgage bonds, the Fed is emphasizing the importance of mortgage rates in its policy.  We don’t think this change was priced into markets, and we expect it to push conventional MBS yields and, with a short lag, mortgage rates even lower.  

However, we think the FOMC’s schedule for purchasing long-maturity Treasuries is slower than market expectations, dulling any impact.  Though Treasury bond yields fell today after the announcement, we think this is mostly in response to the Fed’s view of the economy, not the Fed’s bond announcement.

Bottom line: We don’t expect today’s announcements to improve the outlook.  European developments are more important.  They continue to be negative, with Italian bond yields rising again.  


John Ransom | Create Your Badge

See more top stories from Townhall Finance. New Homepage, more content. Be the best informed fiscal conservative:

John Ransom Obama Creates Chicago Solution to Chicago Problem at Solyndra
Political Calculations The Guess What's the Biggest Driver of U.S. Government Revenue?
David Malpass Operation Twist
Bob Beauprez Fraud Charges Floating for Obama Administration
George Friedman Obama's Dilemma: U.S. Foreign Policy and Electoral Realities
Bob Goldman Alphas of The World, Unite
Jeff Carter Fed Makes Us Twist
Mike Shedlock Three Worst States to Conduct Business: California, New York, Illinois
Email Ransom thfinance@mail.com
Twitter http://twitter.com/#!/bamransom
Advertisement

 

Join the conversation as a VIP Member

Recommended

Trending on Townhall Videos