Twist Is Fed's Most Effective Policy Tool Right Now
Sober Look | Aug 01, 2012 01:08AM ET
The most probable outcome of the FOMC meeting currently under way is the continuation of "Operation Twist" and possibly the extension of the current “exceptionally low… through late 2014” rate guidance to "mid 2015."
Other policy changes are much less likely. A drop in the rate paid on bank reserves is possible but not preferable because it could destabilize money markets functioning (potentially pushing repo rates deep into negative territory with a sharp drop in liquidity). A UK style policy to lend to banks below market rates (to encourage lending) is also unlikely because of sterilized purchases (which may at some point involve nontraditional sterilization techniques such as issuing Federal Reserve bills), will continue to be the primary tool for easing.
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