Will Bernanke Get it Right This Time?
Economists polled by Bloomberg aren’t expecting an answer anytime soon. The Fed is meeting this week for the last time in 2012, but the median estimate of surveyed economists don’t expect the Federal Open Market Committee to adopt thresholds until it meets again in March, perhaps so it can digest any effects of the fiscal cliff and/or Congress’s resolution thereof.
Further complicating Bernanke’s strategy is the fact that Operation Twist, under which the Fed sold short-term bonds and used the proceeds to buy back $45 billion in long-term bonds each month, will expire at the end of the year. The operation aimed to bring down longer-term yields in order to make loans for homes, cars, and large projects less expensive.
At the same time, it was meant to push short-term yields up as bond prices fell. The result, theoretically, was a stimulating effect on the economy. The 30-year fixed-rate mortgage rate was just 3.31 percent in November, assisting a broad but slow recovery in the housing market that has been one of only a few sectors in the economy generating positive news.
At the end of November, U.S. GDP growth for the third-quarter was revised from 2.0 to 2.7, a jolt of good news for the economy following just 1.3 percent growth in the second quarter, and an expected 1.8 percent growth in the fourth quarter. Also buoying some confidence in the economy are non-farm payroll numbers from the beginning of December that indicate the unemployment rate dropped from 7.9 percent to 7.7 percent.
After its meetings this week, the Fed is expected by 48 out of 49 economists polled by Bloomberg to announce a Treasury-buying program equivalent to Operation Twist in size but not design. Operation Twist largely avoided growing the Fed’s balance sheet, whereas the new plan is expected to be an outright purchase program, and could grow the Fed’s sheet to $4 trillion.
Such a huge balance sheet would dramatically complicate the process of unwinding the Fed’s involvement in the market, but there also doesn’t seem to be any way to back down. Bernanke’s given the economy so much gas that now it’s closer to the next fueling station than the last one.
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