Fed’s Operation Twist Won’t Fix the Economy: Macke

Jeff Macke

Distressingly weak August jobs data makes action from the Federal Reserve a sure thing sooner rather than later in the view of Michelle Girard, Senior Economist at RBS. "The table had sort of been set for Fed action," she notes, today's jobs number "just accelerates it."

Girard thinks the most likely course of Fed action is a process of buying and selling Treasury Securities in what's being called "Operation Twist." As she explains it, the Fed "would liquidate some of their shorter term holdings, maybe out to three years in maturity, and then buy in the longer end, hoping to bring long-term rates down." The move wouldn't put more money in the system, making it an "easier sell for Ben Bernanke" to those in favor of no more stimulus.

On the downside, long-term rates are negligible and that fact has resulted in literally zero job creation. Operation Twist is pointless and misguided.

Since Operation Twist solves a problem we don't have, the question is what the Fed can do to create jobs independently from the Federal government. The Fed can take obvious action to bring down long-term rates, crank up the figurative printing press so often discussed, but none of the conventional tools have worked thus far. Lending money to the U.S. via Treasuries already costs money versus inflation, corporations have plenty of cash, and inflation is largely under control. If this doesn't sound familiar you haven't studied the fate of Japan over the last 20-years.

Fed chief Bernanke is of course a famous student of the Depression and Japan. So will either of those economic disasters influence how he responds to the weakening U.S. economy. "Act soon and act bold; you don't wait," Girard says without hesitation. "It's better to do something rather than just sit there and do nothing."

For all the flaws of the current Fed, inactivity isn't one of them. Since their conventional tools have already been deployed, the Fed is going to have to create new ones. If the Fed is truly out of ammo, it's time to find another weapon. If Bernanke is constrained by the Fed's current mandates, he's apt to change the rules.

You don't need to be a student of history to understand that a leadership void will be filled sooner rather than later. No matter which party you identify with, it's impossible to discern any actual action taking place in Washington, D.C. by anyone other than the Federal Reserve.

If elected officials don't like where Bernanke chooses to take us, it's long past time for them to offer America some form of other economic leadership. Until a plan is put in place, no jobs will be created, and the economy will seize even tighter.

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