So what exactly happened on Wednesday? Obviously, for most of you on here you have a pretty good idea of exactly what happened. I thought it might be good to provide a little bit of color as to what was accomplished for those who haven't had time or managed to miss it. Note, some of this is my own opinion and thoughts on what happened.
1. Extended Operation Twist - Everyone by this point knows that the Fed has been buying longer term maturities and selling short stuff. They are continuing that program going forward to the tune of about $267 Billion dollars. This means that the curve will continue to flatten slightly for the foreseeable future. In Layman's terms, the fed is selling 1-5 year maturities and buying up 6-30 years. This pushes shorter term rates up and pushes longer term rates down. Immediately after the announcement the 5 year (right at the fulcrum of this move) got blasted and the 10 year rallied (remember, yields and prices move inversely). They steadied by the end of the day but understand that this is going to significantly cap longer term rates for the foreseeable future.
The bigger question is why does this matter? The whole goal seemingly is to push longer term rates down and pull liquidity out of the longer term market forcing (well, suggesting) investors to reach for higher yielding securities and push businesses to begin spending more. Now, a very interesting statistic to note is that the Fed has actually taken down 63% of the recently issued longer term debt by the treasury. Why does this matter? It basically is Ben Bernanke monetizing the US debt. By buying our own bonds we are effectively ensuring that the government can keep spending and functioning. One of the hopes is that the cheapening of mortgages via sustained lowered long term rates will also help spur the housing market but most of the housing data coming out is a mixed bag. I've always been of the belief that raising rates will spur mortgages moreso than lowering them but we will see.
2. No New QE - This is pretty obvious in watching the market's reaction to the news. I suppose that he is waiting for firm evidence that the economy is slowing down to begin pumping more stimulus into the economy. Granted, with claims edging up today, flash PMI coming in less that hopeful and a continued slowdown in retail sales and overall growth it is looking like the 1.xx% GDP is on the way. Add today's bloodshed in and it is shaping up for another round of stimulus come the speech in Jackson Hole.
3. Economic Forecasts - There was nothing stunning or even really worth mentioning in the forecast they put out, but they do provide a range of 8-8.2% unemployment going forward. As I said earlier, I personally think that if it stays in that range you will for sure see more stimulus. Bernanke was practically begging for the politicians or someone to come to his aid and bail him out here. He is beginning to run out of bullets (some would argue he already is out) and when you look at starting another Trillion dollars worth of QE at 1.6% on the ten year and 8.2% unemployment after everything we have already done... you begin to see the gravity of the situation. The bane of every central banker's existence is deflation so we might even see an upping of the inflation forecasts in the future.
