Back on September 21, 2011, I wrote about the Fed’s Quantitative Easing program of twisting the interest rates on long and short term bonds (The Return of Chubby Checker? Will the Fed Twist Again?). Basically, under the Fed’s twist program: (i) the Fed would sell short-term bonds, and (ii) uses those funds to buy long-term bonds. Their monetary goal is to raise short-term interest rates, which are still at historical lows, and reduce long-term interest rates, essentially by “twisting” the yield curve. The economic goal is to stimulate the economy and create jobs.
Following its meeting on March 13th, the Fed’s key policy making committee voted to make no changes to its ongoing stimulus programs, indicating that it planned to keep interest rates at historical lows at least through 2014. Operation Twist would continue in place with the goal of moving $400 billion from short term to long term paper. At that meeting just three weeks ago, the Fed continued to believe that the U.S. economy remained sluggish notwithstanding the continued addition, albeit modest, of new jobs over the past few quarters.
Following its meeting today, the Fed released its minutes indicating that it is unlikely that it would engage in any further material stimulus programs any time soon. While some Fed officials discussed whether the Fed should continue its program to keep long term interest rates low, essentially engaging in QE3, it appears that the number of Fed officials in favor of continued stimulus is dwindling. The debate seems to center around those favoring stimulus to support the continued sluggish housing market verses those who believe that the economy is on the mend as demonstrated by continued new jobs and may not need further stimulus.
The result today was that short term interest rate futures fell as the market senses that the Fed will not continue its sale of short term bonds in an effort to keep the long term interest rates low and further stimulate the economy. It looks like the Fed will sit on the fence and we may not see QE3 in the near future unless there is a relapse in the recovery.