From Goldman on the FOMC operation twist announcement:————-
1. As we had expected, the Federal Open Market Committee decided to “do the twist” and increase the duration of its securities holdings by selling shorter-maturity securities ($400bn of Treasuries with maturity of 3 years or less) and buying longer-maturity securities ($400bn of Treasuries with maturity 6-30 years).
2. The Fed chose to maintain the interest rate on excess reserves (IOER) at 25bp, contrary to our expectations of a small cut, but overall the details of today’s action were more aggressive than expected in two respects: First, a relatively large portion of the purchases will occur at the long end (29% in the 20-30 year maturity bucket), implying a total impact of more than $400bn in 10-year equivalents, versus market expectations of perhaps $300-350bn. Second, the Fed will reinvest maturing and prepaid agency MBS and agency debt in agency MBS, rather than Treasuries, suggesting a bit more support for the housing sector. The statement retained an easing bias, noting again that the FOMC “is prepared to employ its tools” to “promote a stronger economic recovery in a context of price stability”.
3. Consistent with the more aggressive policy easing, the statement emphasises the weak state of the economy, suggesting “continuing weakness in overall labour market conditions” and “only a modest pace” of growth in consumer spending. The FOMC notes the moderation in (headline) inflation in recent months and, as before, expects it to “settle…at levels at or below those consistent with the Committee’s dual mandate”. While the FOMC still forecasts some improvement in the pace of growth, “there are significant downside risks to the economic outlook, including strains in global financial markets”.
4. Once again, three FOMC members–Dallas Fed President Fisher, Minneapolis Fed President Kocherlakota, and Philadelphia Fed President Plosser–dissented, with the statement noting only that they “did not support additional policy accommodation at this time”.
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