A Message from Jay Robertson – President of First Captial
September 16, 2011
Policymakers have been testing the patience of global markets for a while now, but they could deliver concrete action-oriented solutions in the coming week.
If they can’t, there’s a good chance investors will grow weary of being strung along. In short, it’s time to deliver the goods, and the biggest and most anticipated decision is due from the Federal Reserve.
Consensus has been building for Ben Bernanke & Co. to pursue “Operation Twist,” a swap of short-term Treasury bonds for long-term ones. The logic behind the plan is to essentially twist the yield curve, lowering rates further out, although most economists agree the central bank’s plan would barely budge rates, which may have priced in a move already.
Stocks should get a short-lived lift, but the benefits may not filter through to the economy. With consumer confidence still shot and unemployment at more than 9%, banks will continue to find it difficult to lend out money, even if they have ample liquidity.
There’s also still potential for the Fed to surprise with something other than Operation Twist. After all, when Bernanke announced a two-day Fed meeting instead of the scheduled one-day one in his Jackson Hole speech earlier this August, stocks began rallying despite a lack of guidance or details on further quantitative easing.
So the central bank could still get creative, and some other options floating around include lowering the rates paid to banks to keep their reserves at the Fed, or tweaking how it communicates its policy intentions. All of these changes rest of course on how the “hawks” and “doves” battle it out.
It wouldn’t be surprising to see investors initially cheer an announcement from the Federal Open Market Committee on Wednesday, then gradually pull back. In the longer term, “investors will weigh the dynamics between economic signals and the impact of additional monetary stimulus,” says Barry Knapp, investment strategist at Barclays.
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