Wednesday, September 21, 2011
With 10-yr Treasury yields trading at historic, record lows, we need lower yields to stimulate the economy?
As we wait to hear from the FOMC regarding whether they will embrace the much-hyped Operation Twist strategy, I have to believe that the market will be disappointed. For my money, 10-yr yields are as low as they need to go already. Either the Fed will not embark on a new "twist" strategy, or they will do it in a very modest fashion to show that they are concerned about the economy, but it won't make much, if any difference, to the monetary policy fundamentals.
UPDATE: The FOMC announced a shift in its existing holdings which involves the sale of $400 billion of securities of 5 years maturity and less, coupled with the purchase of $400 billion of securities with maturities of 6 to 30 years, and a decision to reinvest principal payments from existing MBS in new MBS. Thus there will be no material expansion of the Fed's balance sheet. This leaves the major thrust of monetary policy intact, while fiddling around the edges with the yield curve. Given the existing extremely low level of longer-term Treasury yields, I don't see that this policy announcement will have much impact on the overall health of the financial market or the economy.
Posted by Scott Grannis at 10:50 AM