The Fed Wants to Twist Again, Until the Election

Topher Morrison

PurpleSerf.com

Fed Chairman Ben Bernanke and the Federal Open Market Committee.

The once arcane strategy – “Operation Twist” – is evidently becoming a trusty financial tool as much as a screwdriver is to a repairman.  The Federal Open Market Committee (FOMC), charged with overseeing the buying and selling of US Treasury securities, is to meet this week and it looks like another round of Operation Twist is on the table.  The FOMC’s decision whether to inject more liquidity into US markets, in an attempt to inoculate them from European debt crisis, or proceed with other more temperate measures will help influence the financial trajectory of America and with it the rest of the planet for the remainder of the year and beyond.

Operation Twist, selling short-term treasuries in order to buy longer term ones in an effort to bring down long-term yields, is one of many tools available to the Federal Reserve.  In general it is more palatable than firing up the printing presses or plugging fresh zeros into the digital currency supply and then purchasing billions (or potentially trillions) in assets, which is how quantitative easing (QE) is employed and what the Wall Street Oligarchy and Gold Bugs hope occurs.  It may, for the time being, be sufficient for markets to feel the Fed is doing something and therefore Twist 2.0 may be just the ticket.

In previous rounds of QE benefits were double edged, as one can never fool the markets. There was ‘good’ inflation (high prices for equities, corporate bonds, remember: will the Dow hit record high in 2011?) making the rich richer, so to speak, and then there was the collateral damage – ‘bad’ inflation via surging commodity prices – making the poor poorer.  This is of course how the Fed steals for the 1% and the logic, which explains how the Fed triggered the Arab Spring.

While both QE1 and QE2 became intensely controversial Operation Twist, aside from the dubious name, looks to become the preferred method of intervention.  Forbes reports on the upcoming FOMC meeting with regard to the latest limping economic numbers:

“Barclays Capital called Operation Twist ‘the most likely outcome,’ saying it would give the Fed more time to sort out whether recent softness in data is mainly ‘payback’ for hiring during a warm winter or a more prolonged slowdown. ‘If the latter is the case, then more outright asset purchases that expand the balance sheet (QE3) would become likely,’ Barclays said.”

To be sure, as the frequency of crises increase moves like Operation Twist allow the financial engineers to manipulate the economy without having to deal with the underlying causes of addicting entitlements, long term debt and growing corporate malfeasance (got Zucked lately?) and without addressing public concern over persistent and reckless intervention.  But again, nothing changes, Operation Twist is a shell game as much as everything else the Fed attempts. 

The political calculation here, however, is important.  Should Ben “Bubbles” Bernanke go on a printing spree, say by injecting a cool $500 billion, look for Obama to win in November.  If the Fed doesn’t it may harm him according to Gary Dorsch writing for Seeking Alpha:

“Without the artificial life support of QE3, the U.S. stock market could sink ahead of the upcoming election and torpedo Mr Obama's chances. On the other hand, a $500 billion printing operation could lift the Dow Industrial above the May 1st highs, and tilt public opinion in favor of the president over his Republican challenger.”

This would undoubtedly raise Republican ire like no state recognized gay marriage or stimulus bill could and would likely fuel a harder line conservative (sound money anyone?) to take place of a lukewarm Romney in 2016.  The Federal Reserve doesn’t like attention and especially the pesky kind from sound money conservatives like Ron Paul.  Not doing anything that would help Obama will sap any animosity a resurgent and victorious GOP harbors for the Fed in November.

The alternative is of course, Twist 2.0 or perhaps another series of secret European loans or some derivative thereof.   If the Federal Reserve can lay the economic turmoil entirely on Barack Obama’s doormat, which Republicans will happily aid, Ben Bernanke and crew are as usual in the clear.  Suffice it to say that has always been the magic of the Federal Reserve – out of sight and out of mind of the electorate.