U . S . F o r eca s t
maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longerterm interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
Why? Simply put, the problem in the U.S. economy most certainly is not that interest rates – short or long termare too high. The dilemma is that credit flows are insufficient to support a robust expansion. There is not a problem with the price of credit but rather with the quantity of it and it is unclear if operation twist will have any effect on the availability of credit.
This new policy effort has been dubbed “Operation Twist.” No, it has nothing to do with Charles Dickens or Chubby Checker for that matter, but alludes to the anticipated impact on the term structure of interest rates. This policy of selling short-term bonds and pushing down their prices (and raising their yields) and buying longer term bonds thus pushing up their prices (and pushing down their yields) would have the effect of twisting the yield curve - a graph depicting the yields on government bonds of different maturities. The Fed action would simultaneously push down the long end of the yield curve while pulling up the short end—thus, the twist. The purpose of doing so is to make long-term interest rates lower and therefore the cost of borrowing would decline as well. Sounds great, right? Apparently, markets did not think so. Perhaps Wall Street was expecting Chairman Bernanke to emerge from the FOMC meeting with two stone tablets detailing the solution to our long-suffering economy. The stock market sunk as the Fed’s twist plan was revealed. I guess “twist and shout” has been replaced with “twist and doubt.” The market’s skepticism, unfortunately, is warranted.
The most recent release (3rd quarter of 2011) of the Survey of Professional Forecasters by the Federal Reserve Bank of Philadelphia suggests that the 32 forecasters surveyed for the publication are nearly 21% convinced that a decline in real GDP will occur in the 4th quarter of this year. The survey asks panelists to estimate the probability that real GDP will decline in the quarter in which the survey is taken, as well as the probability of a decline in each of the following four quarters. The anxious index (a term coined by The New York Times reporter David Leonhardt) is the probability of a decline in a real GDP in the quarter after a survey is taken. In the survey taken in the 3rd quarter of 2011, the index
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U.S. Forecast | October 2011
Anxious Index Worries on the rise
Figure 1.