The Fed’s operation tweet vs twist
Posted by WARREN MOSLER on January 26th, 2012
Seems to me the force keeping yields down on the short end can be called operation tweet, as the Fed is simply announcing its forecasts for lower rates, which are subject to immediate change, data dependent.
But with operation twist, the Fed actually buys the longer term securities vs just talking about them, as it also lightens up on the shorter term securities.
So after the current knee jerk reaction to tweet I’m looking at the ramifications of twist to dominate.
January 26th, 2012 at 9:48 am
Warren, but if you look at the shape of the yield curve it is pretty much the same as when it was announced Sep 21 2011. What other ramifications are there?
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macrosam Reply:
January 26th, 2012 at 9:54 am
@RSG,
Back end should continue to flatten. 10s look to steep to the belly now, 30s are a steal at these yields.
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RSG Reply:
January 26th, 2012 at 10:03 am
@macrosam,
Why hasn’t it flattend already, the program has been in place for 4 months.
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macrosam Reply:
January 26th, 2012 at 2:05 pm
@RSG,
Still too much supply in the 30-year sector?
WARREN MOSLER Reply:
January 26th, 2012 at 11:07 am
it was in some until this latest (misguided) knee jerk reaction?
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macrosam Reply:
January 26th, 2012 at 2:06 pm
@WARREN MOSLER,
Find it hard to argue with you but Operation Twist is a net add of excess reserves (on a dollar basis and Fed’s stated sales/purchases are in par, but dollar value of longer maturity securities is greater than shorter maturity sales) so wouldn’t the excess reserves depress the front-end?
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WARREN MOSLER Reply:
January 26th, 2012 at 5:01 pm
on balance the fed is removing duration, right?
macrosam Reply:
January 26th, 2012 at 5:12 pm
@macrosam,
Yes, no doubt about it. No disagreement that the curve should flatten. Just think there are enough reasons technical and fundamental why yesterday’s move was to be expected to then continue into a bull flattening.
January 26th, 2012 at 9:49 am
How do you see the chances for QE3? It seems to be back on the table, even after China’s previous complaints.
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WARREN MOSLER Reply:
January 26th, 2012 at 11:08 am
if things get weak enough for the fed to do QE the curve will already have bull flattened to the point where they wouldn’t need to bother
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RSG Reply:
January 26th, 2012 at 12:39 pm
@WARREN MOSLER,
“if things get weak enough for the fed to do qe”
latest string of US economic data would suggest a strengthenig economy, no?
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WARREN MOSLER Reply:
January 26th, 2012 at 1:45 pm
yes, sort of
walter Reply:
January 26th, 2012 at 1:19 pm
@WARREN MOSLER,
So that cannot be the reason for present sell off of the dollar?
Is FED making the way free / pushing for Draghi to lower interest rates further?
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WARREN MOSLER Reply:
January 26th, 2012 at 1:46 pm
it can be the reason near term, as near term market participants can move things in most any direction.
i don’t think the fed much cares about a few basis points in the euro interest rate
January 26th, 2012 at 11:40 am
The epicoalition site is down, so several links from the mandatory readings are broken.
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MamMoTh Reply:
January 27th, 2012 at 2:19 am
@MamMoTh,
Not the right place to mention it or nobody cares?
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January 26th, 2012 at 1:45 pm
Wow, the dollar is clearly going down. It’s as much of a bubble as real estate was in 2005-06. Has anyone looked at this? –http://www.federalreserve.gov/releases/h3/current/h3.htm
The Fed can add to the money supply, but it can’t control where that money is going.
While how much the banks lend to Joe Consumers does not depend on the money supply or reserves (as explained in 7DIF), the QE, Twist, and other new money will be used by speculators to obtain risk-free (or almost risk-free) profits, resulting in further bubbles and distortions. Such bubbles and distortions will have to pop as long as we have at least remnants of the free market (i.e., non-coerces production coupled with the totality of individual decisions of market participants).
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