Let’s Twist Again

(By Fisher Investments) As was widely anticipated, the Federal Reserve announced Wednesday it will extend Operation Twist a further $267 billion (OT2!) through the end of 2012—citing recently slowing economic progress in areas like employment and household spending.

As a refresher, Operation Twist is the Fed's bond-buying program, first announced in September 2011, whereby the Fed sells short-term bonds and buys longer-dated Treasurys, ostensibly lengthening the Fed portfolio's average maturity. The stated aim is bringing down (or maintaining already-low) long-term interest rates and thereby ideally encouraging borrowing to finance investment and spending—for example, on long-term purchases like homes.

Which is fine, and the Fed seems to believe this will be helpful. However, interest rates of all maturities are already pretty low. What's more, the action seems likely to flatten the yield curve a bit—when the Fed itself considers a steeper yield curve a sign of relative economic health. Then again, that's only if OT2 works.

In hindsight, there's been little evidence the last Twist had much impact—long-term yields have undoubtedly remained relatively low, so maybe that's one indication it at least didn't have the opposite of the intended effect. But still-low rates could also be tied to the fact US debt is still the primary safe haven of choice, given the eurozone's continued woes and an overall global lack of highly rated debt. Then, too, it's hard to credit OT1 with much in the way of gangbusters economic growth.

That said, it also seems relatively unlikely extending Operation Twist through year end and to the tune of a relatively minor sum does much harm. And it's a much smaller step than introducing new quantitative easing (QE) measures, which likely would have prompted some concern inflation may tick up in the near future.

Meanwhile, the Fed's counterparts across the pond were debating similar topics, though the Bank of England (BoE) decided against increasing quantitative easing measures—quite narrowly, and only for now. It's entirely possible the BoE takes action in the near future. In fact, given the narrow split in this most recent decision, many believe UK QE is increasingly likely this summer.

In our view, the US's and UK's recent central banking announcements seem unlikely to have much fundamental impact. Maybe they result in increased confidence central banks will be accommodative when they deem it necessary—something they've consistently been since 2008's global financial crisis. Maybe the actions disappoint some who'd hoped for more. More broadly speaking, though, these kinds of fringe sentiment impacts just don't seem likely to carry very many large, lasting economic or market implications.