Wednesday, June 20, 2012

Like We Did Last Summer

Said the Fed: "The economy's gist, again,
Is that lackluster data persist again;
In short, we have found
That it's coming unwound,
So come on now baby - let's twist again!"

The policy makers of the Federal Reserve Open Market Committee conclude their latest two-day meeting this afternoon with a Ben Bernanke press conference at 2:15 EDT. Most observers expect that, in view of lingering economic weakness in the US, and the downside risks posed by the euro zone debt crisis, the Fed will continue with the so-called Operation Twist.

Under this groovy program of monetary stimulus, the Fed sells short-term Treasury bills and notes, and invests the proceeds in long-term bonds (either Treasuries or mortgage-backed). In so doing, Chairman Bernanke and his cohort hope to stimulate credit activity by holding down the cost of long-term borrowing. As we have seen, this program has had mixed results, in part due to many Americans' limited access to credit. Then again, the tools of the Fed are also limited.

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