Tags: BNP | Fed | Twist | Fail

BNP’s Coronado: Fed’s Expected Twist is Doomed to Fail

Tuesday, 20 Sep 2011 08:56 AM

The Federal Reserve is widely expected to announce a plan to spark more job-creating economic growth by selling short-term government securities it owns and stocking up on long-term debt.

The move, known as Operation Twist since it twists the numbers on the yield curve around, aims to keep interest rates low so more lending ensues.

It's not going to work, says Julia Coronado, chief economist for North America at BNP Paribas, since it doesn't pump new money into the economy like past measures did, known as quantitative easing.

Coronado, who predicts a mild recession beginning this month, tells MarketWatch the Fed will eventually roll out more quantitative easing, where it buys assets from banks in order to stock those banks full of money so they'll invest and lend again.

"If things deteriorate, they will definitely have to take more action and let go some of the reservations about controversies surrounding balance sheet expansion and just do what they have to do," Coronado says.

Critics say quantitative easing may lead to inflation.

Others agree that Operation Twist could help somewhat but won't bring about huge economic improvements, including Paul Kasriel, chief economist at Northern Trust.

"Operation Twist isn’t going to do anything to increase the supply of credit," Kasriel tells the Kansas City Star.

Some say only time can heal the economy.

"With banks still repairing their capital positions and interest rate levels hardly an impediment to growth, the Fed has run out of effective tools to do anything more than marginally affect markets, and whatever it does from here is basically politically driven and will have little economic impact," says Josh Shapiro, chief U.S. economist at MFR, according to MarketWatch.

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The Federal Reserve is widely expected to announce a plan to spark more job-creating economic growth by selling short-term government securities it owns and stocking up on long-term debt. The move, known as Operation Twist since it twists the numbers on the yield curve...
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2011-56-20
Tuesday, 20 Sep 2011 08:56 AM
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