Wednesday, September 21, 2011

Fed Twist Quickly Sinks Stock Market As Monetary Tools Lose Punch

Today's a good day to be smart-alecky and say "I told you so," because I've long suspected that the Fed is running out of effective monetary games to play.  The Federal Reserve announced the launch of its "Operation Twist" bond-gaming program designed to keep Uncle Sam's borrowing costs as low as possible.  Note that the Bernanke Fed's approach to telegraphing its moves in advance is a far cry from the Greenspan Fed's opaque approach that kept market watchers guessing.  Anyway, as soon as the Fed disclosed the macroeconomic worries that prompted its decision, the DJIA lost two and a half percent of its value

The shortening duration of the U.S. government's debt is putting the Fed into a box.  The inability of further monetary measure to keep asset prices afloat is going to force internal Fed dissension out into the open soon enough.  The traditional six-month lag for monetary policy to take effect won't be long enough for the Fed's anti-inflation dissenters to wait.