The Fed Is Running Out of Room to Twist
The Federal Reserve announced at the conclusion of today's meeting that it will continue its maturity extension program, known as Operation Twist, through the end of the year. This time it plans to buy $267 billion of notes and bonds with maturities of six to 30 years, and to sell an equivalent amount of short- term bills and notes.
Why so small? The current program, which ends June 30, totaled $400 billion.
Answer: The well is running dry. After various rounds of bond purchases, the Fed owns only $175 billion of securities maturing in three years or less, according to Jim Bianco, president of Bianco Research in Chicago. By his estimates, that amount will rise by $100 billion by year-end.
At least we won't have to contemplate Operation Twist 2.0 (3.0 if you count the 1961 effort). And that's a good thing, because fiddling with the maturity of its portfolio is not the same as expanding its balance sheet. And based on today's reaction -- the 10-year Treasury note spent 10 minutes in positive territory after the 12:30 p.m. announcement -- the market may not give Bernanke the lower long-term interest rates he wants.
In addition to renewing Operation Twist, policy makers downgraded their forecasts for gross domestic product growth, unemployment and inflation in the wake of lousy economic news. At his press conference, Bernanke left the door open -- wide open -- for additional quantitative easing, or outright securities purchases.
If the economy is as bad as the most recent data (on everything from employment to retail sales to capital goods orders) suggest, the Fed is likely to take further action, election or no election in November.
With today's action, Bernanke may have created the illusion of doing something for the economy. Next time he may actually have to do something.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)