Will the Fed Cave to Market Pressure?

• Posted by Robert Sinn
• on June 19th, 2012

The economic benefits of QE2 were limited at best and the excuse of lowering borrowing rates has become absurd with the 10-year US Treasury yield at 1.61% and the 30-year fixed mortgage rate at 3.63%. The base case scenario appears to be an extension of the low rate language until 2015 and another, albeit smaller, round of Operation Twist. An additional $200 billion round of Operation Twist  would simply force more investors farther down the yield curve or further out on the risk spectrum into corporate bonds.

Meanwhile, some market observers and participants are calling for additional asset purchases (QE focused on MBS and Treasuries) due to the idea that the Fed will be the first mover in another round of global monetary policy easing. One analyst on Bloomberg called a 1.2% yield on the 10-year a plausible level for the bond rally to reach and several market observers have mentioned that “the Fed must initiate additional QE or the market will sell-off” - this may be true but would once again mean the Fed bowing to market expectations and not remaining independent. If the last market reaction to Twist was any indication, market bulls better hope Bernanke delivers the QE syringe:

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Silver ($SI_F SLV) is trading lower today and has been recently stuck in a tight range in the $28s, perhaps this is because silver REALLY didn’t like Operation Twist the last time the Fed tried it:

 

I’m sure the FOMC will announce something new in the statement and that Bernanke will talk dovish during his press conference, if additional LSAPs (large scale asset purchases) are announced there are likely to be a few dissents from the “Hawks” on the committee. It seems to me that the policy easing ball really lies with the ECB, not with the Fed but tomorrow’s announcement and press conference will be one of the more anticipated ones in recent memory due to the high market expectations going in.

 

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