Fed Continues to Twist in the Window

This is the fourth post in our series of blogs on the Eurozone crisis. Again, thanks to Troy Warwick for analyst coverage.

Amidst the worsening euro crisis, investors have expressed worry in the Federal Reserve’s decision to increase their Maturity Extension Program—also known as "Operation Twist."

The FOMC announced yesterday that the new phase of Operation Twist, which is designed to lower interest rates on Treasuries and spur to the economy.  The Fed plans on selling $267 billion in shorter-term securities while buying securities with six- to 30-year maturities. This should be completed by the end of 2012.

Is the Fed’s plan better than nothing? Perhaps, but the markets are starting to catch on that kicking the can down the road simply isn’t enough.  The markets had been rallying into the announcement yesterday, but fell afterwards (and are still dropping today). This is a similar response to the news a few weeks ago that the ECB was making available $125 billion for Spanish banks. It seems that a sustainable rally will only occur with significant progress toward the long-term issues plaguing the world’s economy.

 

 

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