As expected, the Fed announced more easing at the conclusion of yesterday’s FOMC meeting. It came in the form of more Operation Twist, which aims to lower long-term interest rates by selling short-term bonds and buying long-term bonds. However, the Fed may have disappointed some market participants who were hoping for a bigger, more aggressive easing announcement out of today’s FOMC meeting. Markets initially sold off on the news that the Fed was merely going to extend Operation Twist through the end of the year.
SocGen economist Aneta Markowska sees a silver lining in the announcement, though, suggesting the Fed is aware that more may need to be done soon. She writes in a note to clients that the Fed’s forecast for growth must’ve been pretty bad:
The Fed’s estimate of potential growth now stands at 2.4%, so the Fed’s forecasts imply below trend growth for this year and just barely above trend for 2013. Not surprisingly, this pushed up the entire unemployment trajectory. Unemployment is expected to remain broadly unchanged this year and decline very slightly in 2013.
It is important to keep in mind that these new forecasts had to incorporate the impact of the new stimulus, so the implied message is that the twist extension is not seen by the Fed as potent enough to fully offset the deterioration in the economic outlook.
Here is a chart showing the Fed’s new estimates for sustained higher unemployment given today’s downgrades to their growth forecasts:
Photo: Société Générale
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