Get out your dancing shoes, cuz this Wednesday (September 21) the Federal Reserve Bank is widely expected to "do the twist" -- "Operation Twist," that is.
The strategy (named for the Chubby Checker tune), was first introduced in the 1960s as a tried -- and failed -- method of using monetary policy to turn (or twist) the yield curve in a favorable, i.e. economic growth-inducing, direction.
Here's how the 2011 version should work: The Fed sells $300-$700 billion of securities maturing in three years or lower -- AND then uses that money to buy longer-dated securities maturing in 7-12 years. Says a September 20 MarketWatch article:
"The program is designed to lower long-term rates. This could help mortgage holders refinance and lower the cost of borrowing... and bolster the economy."
Of course, long-term rates are already scraping the bargain barrel.
EWI's September 19 Short Term Update presents the following chart of the US 10-year note yield since 1970 -- alongside this poignant critique of the Fed's recent effort to "twist" the economy back into shape:
"This procedure is an attempt to flatten the yield curve. But the economic problems are not because the yield curve is too steep, or because government rates are too high; the 10-year T-note yield is already the lowest in at least 55 years.
"The problems are due to 75+ years of credit expansion and debt build up that is now being unwound as social mood turns increasingly pessimistic."
"Operation Twist" is just another of the same "Operation Three Cups and a Ball" the Fed has carried out since the start of the 2007 credit implosion. The central bank continues to shuffle its "cups" of various bond grades back and forth, and back and forth, all the while the "ball" of money flowing into the economy never moves.
So, can Bernanke and the Fed do anything to lead the economy out of turmoil?
EWI's analysis keeps you glued to all the signs of recovery or relapse.