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Fed "twists" and market shouts

Wednesday, September 21, 2011 - 02:14

Sep 21 - The stock market sank after the Fed unveiled details of its new plan to twist its balance sheet more heavily towards longer term debt- in yet another effort to boost the sagging U.S. economy. Bobbi Rebell reports.

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In a rare move the U.S. Federal Reserve unveiled details of a new $400 billion plan to help boost the U.S. economy. Dubbed "Operation Twist"- the Fed will twist its $2.85 trillion dollar balance sheet more heavily towards longer term securities. Essentially they will sell shorter term government debt, and buy Treasuries with maturities 10 years or longer. In an effort to boost the dismal housing market, it will also re-invest proceeds from other housing-related investments back into the mortgage market. Max Wolff is the Chief Economist at Greencrest Capital: SOUNDBITE: MAX WOLFF, CHIEF ECONOMIST, GREENCREST CAPITAL (ENGLISH) SAYING: "I think this move will not have a huge impact on the economy. I do think it's generally supportive. I think it's probably defensible that the Fed did this. The problem the Fed has is it's under enormous and increasing political pressure. It's been politicized more than most people historically would have expected to be and also the economy has been persistently weak, and therefore the obvious and easy Fed actions have been taken." The Fed Funds rate will remain close to zero, as the Fed sees a subdued inflation outlook, at least for now. The action got a mixed reception in the financial markets with stocks moving lower in reaction to the Fed's dismal economic outlook. But prices for long term debt rose, pushing yields lower. Of note: There were 3 dissenting votes- pointing to friction in a Fed that could face even fewer options for monetary policy going forward. Nationwide Chief Economist Paul Bellew: SOUNDBITE: PAUL BELLEW, CHIEF ECONOMIST, NATIONWIDE, (ENGLISH) SAYING: "So as we get into the November meeting and we get into the meetings in 2012, it's going to be interesting to see what's really left, because by our estimation there really is not much. And therefore the focus has to shift to the other side of Washington and that is what is happening in terms of fiscal policy. And really the focus should be shifting there because we have big questions with regards to tax policy affecting us as soon as January of 2012." The Fed's action is becoming increasingly politicized as the Presidential race heats up, with top Republicans urging Bernanke to resist further interventions. Bobbi Rebell, Reuters.

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Fed "twists" and market shouts

Wednesday, September 21, 2011 - 02:14