Explaining Southern California's economy

The investors' view on the Federal Reserve's interest rate decision

Ben Bernanke

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Federal Reserve Chairman Ben Bernanke. Will continued low interest rates lead to inflation? Some money managers don't think so.

The Federal Reserve's Open Market Committee announcement Wednesday wasn't a big surprise on the interest-rate front. The Fed has stated it intends to keep short-term rates low for the foreseeable future, in an effort to stimulate the economy and push investors into riskier assets, like stocks. A continued low-interest rate environment will also continue to bolster the housing market, where mortgage rates are at historic lows.

Fed Chairman Ben Bernanke and the rest of the FOMC annouced that they will keep rates low until unemployment falls to 6.5 percent. It will also continue to buy up mortgage-backed securities, at roughly the same rate it has been (so-called "Quantitive Easing," installment 3, or "QE3").

[UPDATE: I slightly misinterpreted what the Fed is doing on the bond-buying side. It's also worth noting that the Fed is now saying that it will keep interest rates low until unemployment hits a specified level. This is a policy departure from saying that rates will stay low until the economy improves. But anyway, bond-buying: the Fed is going to double what it's doing in the QE front and change "Operation Twist" into an extension of QE3. The older aspect of QE will still involve buying MBS. But the additions to QE3 will entail buying long-term U.S. Treasuries without selling short-term bonds. This is important as it means the Fed will be adding $85 billion per month to its balance sheet — under Operation Twist, it hadn't grown much, which was viewed as an way to "sterilize" against inflation. Former Dallas Fed President Bob McTeer has a good post about the FOMC decision at Forbes.]

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Let's rebrand 'Operation Twist'

So the Federal Reserve, to no one's surprise, is going to adjust its portfolio, selling short-term debt and buying long-term debt in a effort to drive interest rates down below the surface of the sea and involve mermaids in the magical business of monetary policy and the recovery of the U.S. economy. They're calling it "Operation Twist," after a similar maneuver that was last executed in 1961, back when Chubby Checker had the kids a-twistin' like Ben Bernanke after a barbecue lunch with Rick Perry in Lubbock. (MSNBC actually tracked down Chubby for his perspective, and he provided the in-fact quite good advice to just spend money). 

Even the Fed, it turns out, can't get enough of the 'Mad Men' era. What's next? Let's hope it's not "Operation Cuban Missile Crisis."

Operation Twist Again probably isn't going to perform miracles — economists figure it could add slightly to GDP growth and bring unemployment down marginally. But it's disappointing that our economy is in such a downer that our Central Bank has to set the Wayback Machine to the Kennedy Administration to come up with its voodoo — and that American culture has gotten so bad at generating cool new names for dances that the Fed has to reference a year when the Dow started at 610 and finished at 731. Not that we'll headed for those numbers again. But I'm just saying'…

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