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.”
It went on to say, “It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy. We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.”
The Democrats were appalled so much so that Senator Charles Schumer, "a heavy-handed attempt to meddle in the Fed's independent stewardship of monetary policy" and said it should be "ignored by Chairman Bernanke and the Fed's policy makers."
What can't be ignored by oil traders is the possible impact on oil prices. As I wrote before that while QE1 and 2 has an almost immediate impact on prices by devaluing the dollar and increasing demand in the emerging markets where commodities after QE seem to go on sale. The twist it is hoped will have a softer impact as the longer term commitment of capital will not impact demand. Unless of course the market focus on the value of the dollar and that will be the key. The other downfall may be the fact that the yields in the short end of the curve are so low that the long end may not inspire the type of long-term activity hoped for like buying homes and building factories.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
