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Wednesday, June 20, 2012

Will the Fed "Twist"?

Markets are getting bulled up on expectations of a perceived friendly Fed, including the possibility of a "Twist" operation.

What is a "Twist"? It is basically trying to lower long-term rates and raise short-term rates.  By manipulating the yield curve in this way, it supposedly helps the mortgage market.

But...the yield on the 10-year is at 1.65% and 30-year fixed rate mortgages are at 3.70%!  How will artificially pushing rates to even lower levels make a difference?

At this point, Bernanke is exploiting the Pavlov's dog characteristic of the markets.  Mention "Quantitative Easing" (or even just QE!) or "Operation Twist" and the stock market starts salivating. 

Maybe I was the only one taking notes in Econ 101, but I learned there that manipulating prices leads to misallocation of resources.  In the end, this ends badly - witness 2008.


  1. It's hard to see what more the Fed can do. Maybe factors outside the Fed's control are keeping the economy in the doldrums.

  2. It appears more and more everyday that the economy is stalling so any help from the fed cannot really do much harm.

  3. Interesting view point. I think this is a global issue which needs a combined effort.