Bernanke’s Twist sharpens year-end stimulus anxiety

Federal Reserve Chairman Ben Bernanke Federal Reserve Chairman Ben Bernanke

June 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke has repeatedly warned lawmakers that a fiscal cliff threatens the economy. Now he’s created a precipice of his own.

The Fed on June 20 extended its Operation Twist program to swap $267 billion in short-term securities with longer-term debt through December. That end date coincides with reductions in federal spending, a halt to payroll-tax cuts and expiration of income-tax cuts enacted under President George W. Bush.

The timing of Bernanke’s easing raises the stakes for the Fed’s four remaining policy meetings this year as investors focus on whether the central bank will provide stimulus for 2013 to help the economy overcome the impact of the fiscal tightening due to take hold in January, said Vincent Reinhart, chief U.S. economist at Morgan Stanley.

“They create their own monetary cliff to match the fiscal cliff,” said Reinhart, former head of the Fed board’s Division of Monetary Affairs. That may mean “a world of hurt” for the central bank because there would be a perception the Fed allows fiscal politics to influence its actions.

The Fed’s extension of Operation Twist, along with cuts to its growth and employment forecasts, sent U.S. shares lower. Stocks rallied today, pushing the Standard & Poor’s 500 Index up 0.4 percent to 1,330.96 at 9:35 a.m. in New York.

The Federal Open Market Committee should have prolonged Twist into 2013, said Kathy Jones, fixed income strategist in New York for Charles Schwab Corp., which has $1.76 trillion in client assets. “I’m surprised they didn’t extend further into the first quarter to get over the hump” from fiscal tightening.

Reduced Expectations

Federal Reserve Bank of St. Louis President James Bullard said in a Bloomberg Television interview today that this week’s FOMC decision was a “continuation of the existing policy” as officials “felt that it was maybe a bit imprudent to end the Twist program right at this particular juncture.”

“The committee has kind of been haunted by having end dates on programs,” Bullard said.

Policy makers this week cut their expectations for growth in 2012 to a range of 1.9 percent to 2.4 percent, down from an April prediction of 2.4 percent to 2.9 percent. The forecasts have been lowered in five of the six economic projections since January 2011, when most central bankers predicted the economy would grow 3.5 percent to 4.4 percent in 2012.

The latest estimate is in line with those of private forecasters, who project 2012 growth of 2.2 percent, according to a Bloomberg survey. The FOMC has cut its projections for 2013 six times since January 2011.

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