Leader_Come on and twist a little closer now

美联储不应气馁

For the just the second time in its century-old history, the Federal Reserve has engaged in an attempt actively to twist the US yield curve to a flatter shape. This “operation twist” will have the most powerful effect if it marks a beginning and not an end to how far the Fed is willing to go down the route of unconventional monetary measures to rescue the recovery.

The immediate response from markets was disappointing. Yields had already priced in expectations of a twist. That by itself is no discouragement: it means that the move started working even before it was formally announced. But other markets paid less attention to what the new action may achieve than to the renewed pessimism by which the Federal Open Market Committee justified it. “Significant downside risks” cited by the FOMC, and borne out by bad economic survey results from China and the eurozone, have sent equities down and the dollar up.

It is premature, however, to judge whether the Fed’s shifting of $400bn of its balance sheet from shorter-term to longer-term assets will bear fruit. The answer will lie in market and economic behaviour over the next months, not days. But there are reasons to fear that little good will come from the twist.

Some are technical: in a world with seized-up unsecured lending, mopping up the best collateral on offer may restrain secured lending rather than channel funds to risky assets. Some are economic: the direct effect of the twist – lower long-term interest rates – is of limited benefit when it is deficient demand and not dear finance that keeps companies from expanding.

And some are political: the pressure not to “print money” (expand the Fed balance sheet) is illustrated by the Republican leaders who this week sent the Fed a letter that amounted to rank interference with the central bank’s independence. The FOMC’s choice of a twist rather than a third round of quantitative easing shows that it is not immune to such pressure.

Which is why the battle for the hearts and minds of markets matters as much as tactical price and rate changes on the ground. To get business to spend, invest and hire, policymakers must drive out the fear that things will worsen before they improve. Enabling lower long-term interest rates can be part of that, but only a small part. At least as important is to communicate that the Fed will not shrink from doing more (what some call “operation shout”). Markets are far from being seduced, so the Fed must try harder. Doing the twist without a partner just looks sad.



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