The Fed Meeting and Follow Up Comment

I received quite a bit of feedback regarding yesterday's posting and thought it might be helpful (cathartic?) to follow up with some news about the Fed meeting today/tomorrow and the think tank reaction. We all have our ideas and some of them might actually be effective....

The FOMC meeting gets started today, a two day affair leading to tomorrow's policy statement and belief the Fed will officially announce "Operation Twist" as it is being dubbed. Many now are confident the Fed will act; if it doesn't, the long end of the yield curve (10 and 30 yr bonds, as well as mortgage markets) will likely be hit hard. The Fed will decide to replace short-term treasuries in its $1.65 trillion portfolio with long- term bonds, according to 71% of 42 surveyed economists. The move, likely to try and bend the yield curve, will probably fail to reduce the 9.1% unemployment rate, 61% of the economists said. Among those, 15% predict it will be “somewhat harmful.”


Looking over the wires this morning, it appears there is little in the way of understanding what "Operation Twist" will do for the economy. Stories are lining up that the stock indexes are better this morning on belief the Fed's expected move will help the economy. I don't subscribe to that thinking; lower long term interest rates that are supposed to go lower on the Fed move will have little if any impact on unemployment, will not likely motivate small businesses to spend or hire, and won't do much for the housing sector.

To reiterate the point, Banks are scared to death to lend. Regulators continue to step on them with more red tape and regulations that simply do not make sense. Then we have the FHFA launching law suits against the large mortgage lenders demanding re-payment of as much as $800B for what FHFA is saying were faulty loans; and telling Fannie and Freddie to increase fees by as much as 10 basis points.

Washington continues to be unable to get out of its own way; suing banks so late in the game is counter-productive and sends a message that lenders are at risk for anything they do. Will the new norm be that bureaucrats/banks operate with one foot on the throttle, one foot on the brake, and only act when no one is in the rear view mirror? Is it any wonder banks won't lend?

Until next time...