Ben Bernanke and the Federal Reserve Board will conclude their final policy meeting of 2012 today. Though the meeting is being somewhat drowned out by the fiscal cliff lunacy, the Fed's next course of action is hardly inconsequential. Top on the list for Fed watchers is exactly how the committee chooses to address the end of Operation Twist at the end of the month.
Started in September of last year, Operation Twist entails the Fed buying $45 billion per month in long-term Treasuries while simultaneously selling the same amount of short term paper. The idea is to lower short-term rates while increasing the cost of longer term money. In theory this effectively puts a slope in the yield curve artificially.
Brian Wesbury, chief economist at First Trust Advisors, says he has a good idea what the Fed is going to do instead of Twist, but that doesn't mean he likes it. "A majority of us economists now believe they will get rid of the selling part and just leave the buying part," he states.
Should that prove to be the case, Wesbury believes the Fed will spend 2013 buying $40 billion in mortgage-backed securities and another $45 billion in Treasuries. The move would be tantamount to Q4, a step diametrically opposed to Wesbury's dream that "the Fed would literally at this point just go away."
The question is why the Fed is still involved in this mess in the first place. Aggressive stimulus has its roots in the financial crisis of 2009. It's "mission accomplished" in the sense of the global banking system seemingly not on the brink of a catastrophic meltdown.
So why keep printing?
The Federal Reserve's dual mandate is keeping inflation in check and fostering an environment which supports maximum employment. Bernanke's personal hobbyhorse has been riding elected officials to come up with a fiscal plan, complaining that the Fed was, in essence, doing the government's job for them.
Employment is improving. Inflation seems reasonably in check. A new group of elected officials are coming and will continue to dither on a fiscal plan. Bernanke has never had a better opportunity to pressure DC. If the politicians won't listen to the citizenry on coming up with a plan, they will certainly listen to the man printing the money that enables the pols' dickering.
Bernanke's work is done. It's not a matter of "weaning the U.S. off heroin" or saving the free world through printing. The simple truth is monetary policy has done all it can and then some. It's time for Bernanke and the FOMC to recede into the background where they've always belonged.
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