GOP set to attack "twist" on QE

Dirty Dancing


Republicans Come Out Against The Twist! No not the dance but the expected twist by the Federal Reserve that is expected to be announced today. Twisted? Absolutely. At the same time it is making what might have been a boring Federal Open Market Committee (FOMC) meeting getting into a debate about "Dirty dancing"!

Just what is the twist!

Well it is a new form of Quantitative Easing where the Fed tries to inspire rates the long end of the yield curve lower by extending the duration of their portfolio in an attempt to stimulate long term investment. The Federal Reserve has a balance sheet of over $1 trillion dollar in bonds. Bonds that they bought with what some say is printed money, QE, over the past few years. The Fed went to QE to try to stop deflation and inspire investment.

Yet the perception that the Fed was printing money caused the dollar to drop and caused commodities to rise and sent hot money around the globe into the emerging markets. Yet banks held onto lot of that money mainly because they could make more money by holding onto to it with little or no risk as opposed to lending it out. In fact as low as long term rates are, they still are higher than the rate of inflation. The Fed owns hundreds of billions of dollars worth of medium-term bonds which come due in the next few years. The Fed has reinvested maturing paper by investing in medium-term paper in an effort to stimulate the economy but with inflation low it hasn’t provided enough incentive for banks to lend or for businesses to make long-term commitments.


As I said before looking at the yield curve and the falling rates on the long end there seems to be a large sector of the trading population that thinks this is a done deal. Of course the reason that the Fed is twisted is the fact that QE2 did not seem to have the desired effect and some Republicans seem to suggest that the Fed should not try this experiment.

You see Republican lawmakers feel that because QE2 did not work they don't expect that this round will work. They are fearful it may actually do more harm than good. A letter to Fed Chairman Ben Bernanke from Sen. Mitch McConnell, House Speaker John Boehner, Sen. Jon Kyl, and Rep. Eric Cantor stated, “It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.”

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