Twist? We want more

...markets were hoping for something more, a commitment to (or at least a hint of) full-blown QE, in defiance of the Republican leadership. This may be allied to the view that the twist idea may make little difference to the macro-economy. After all, ten-year Treasury bond yields were already below 2%, at the bottom of the historic range; it is surely not high rates that are stopping companies and consumers from borrowing. Simon Smith at fxpro also made the point that forcing short rates up and pushing long rates down, was not good news for banks which borrow short and lend long and have recently been making a good deal of money from the gap between the two.


Royal Bank of Canada took the view that

the economic impact will be low; the private sector is simply not responding to low yields and the housing market is languishing amid low confidence and demand while mortgage lending standards are tightening. That risk has sold off in response to the more aggressive Twist speaks volumes about investor perception of policy flexibility and credibility

A more positive view came from David Zervos at Jefferies who has long argued that the Fed will do whatever it takes to revive the markets, and has thus favoured an overweight equities approach. Mr Zervos even took heart from the negative market reaction writing that

I think the market (is) making a mistake in getting too beared up, but time well tell. As for the immediate market reaction - the HUGE USD rally, the equity dump and even the dump in Gold - the easy interpretation will be that the Fed needed to do more. And I am sure that will be the interpretation back at 20th and Constitution Ave - the message was loud and clear. If we see a continuation of this price action, expect a VERY strong response in both speeches and action from the FOMC in the next 6 weeks

The opposite view came from Mads Koefoed, the macro strategist at Saxo bank, who said that

Not only does Ben Bernanke signal yet again that he has no clue - or even worse no potent weapons -to combat the second round of double dip fears in little over a year. With the Fed launching Operation Twist Bernanke furthermore runs the risk of arriving too late at the party with a solution for the second time in 10 months, as his QE2 programme last November came so late that the economy had long rebounded and the programme fuelled a massive commodity rally instead, which ultimately weighed on U.S. consumers in the first half of this year and forced the economy into a halt yet again.

Broadly speaking, then, one can say that market reaction to the Fed shows either the fear that the central bank is running out of ammunition (at a time when fiscal policy is also constrained) or that the Fed will simply have to act more decisively (just as many believe the ECB will eventually have to buy a lot more Italian and Spanish bonds).

http://www.economist.com/blogs/buttonwood/2011/09/markets-and-monetary-policy