The narrative around the Fed’s announcement on Wednesday is that it went ahead with a $400bn ‘twist’, towards the larger end of what was expected — despite some pretty heavy pressure from the Republicans a couple of days earlier.
But was the launch of Operation Twist such a fearless easing measure, after all?
Not just in the sense that selling short-dated bonds will raise yields and, in turn, the dollar. Which of course, it has. There’s no expansion of the balance sheet, after all.
The yield spread reflects the stance of monetary policy. According to this view, a low yield spread reflects relatively tight monetary policy and a high yield spread reflects relatively loose monetary
As Sumner adds, the dollar rose along with short-term Treasury yields on the news.
Stock markets are also reflecting a big risk-off sentiment.
Of course, it’s debatable how much of this is due to the Twist launch itself, and how much to the mention of “significant downside risks to the economic outlook”, and how much just to the general despair that this type/scale of action will be adequate in the face of a looming slowdown and contractionary fiscal policy.
A few more analysts’ reactions to the FOMC statement – FT Alphaville