Friday, November 4, 2011

Operation Twist Progress

Remember that whole operation twist thing that the Fed is doing?  So far it did a lot more to flatten the yield curve prior to its implementation than it has since it's been implemented.  Since the Fed announced operation twist on September 21, the yield curve has actually steepened somewhat--the exact opposite of what the program is supposed to accomplish.  This is similar to the effect of the QEs on the market, which were supposed to hold long rates lower, but actually always ended up raising long rates.

The fact that market prices tend to move in the opposite direction of the way theory says that they should on a mechanical basis brings into question the extent to which the Fed can have a "mechanical" effect on the market and the extent to which the Bernank is just playing a game of managing mass psychology.

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