Something ironic about the big Fed Operation Twist announcement today…Ostensibly, the idea behind selling short term debt and buying more long term debt is to bring interest rates down, with all the (theoretical) advantages that brings to the economy.
And boy (!) did interest rates come down today. The 30-Year is now at 2.98%. The 10-year yields 1.85%, which is basically the lowest in history.
And though the Fed wants rates lower, this is a bad sign. That kind of dramatic Treasury buying (especially coupled with the heavy selling in stocks) is a pretty clear sign that growth and inflation expectations are declining, which is exactly the OPPOSITE of what the Fed wants to see.
Remember, QE2 was also ostensibly about keeping rates down, but because it created a boom in risk assets (however temporary) long rates moved much higher during it.
What’s particularly worrisome too, is that it seems like the Fed really went about as aggressive as it could on the Operation Twist front.
Nomura makes a strong case here for that:
The most notable move was the Fed’s announcement that it would “support conditions in mortgage markets” by reinvesting “principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”
What’s more, the FOMC announced its intent to “purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less” (Figure 1). Selling the front-end means this is a more active version of the so-called “twist” option than we had anticipated. The Fed hopes that its action will “put downward pressure on longer-term interest rates and make broader financial conditions more accommodative.” The size and length of the twist program implies monthly purchases of $50 billion (over the 8 month period). The combination of MBS purchases and the extension of the average maturity of the Fed’s portfolio should provide more support than anticipated for the housing market.
The main takeaway, sadly: Be scared. The Fed brought out its latest weapon, and the conclusion of the market was that it didn’t have the ammo to make a difference.
And again, the irony: The Fed wants lower rates, but the dramatic move down in rates is a strong signal that what the Fed is going to do won’t work.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.