Wall Street Rejects Operation Twist

By Jeff Harding

The markets didn’t like the Fed’s announcement today. When the FOMC announcement hit the tape at about 2:21 p.m., the market nose-dived. I think they were expecting more, such as a lower FF rate, or some QE, or reducing interest paid on bank reserves. Alas.

Here is a chart of the S&P 500 today. You can see when the Fed announcement hit the tape:

From Bloomberg:

The S&P 500 Financials Index (S5FINL) fell to the lowest level since July 2009. Bank of America Corp. tumbled 7.5 percent after Moody’s Investors Service downgraded the bank’s long-term debt rating. Wells Fargo & Co. also had its long-term rating cut, wiping out an earlier gain and dragging the stock down 3.9 percent. Citigroup Inc. (C) fell 5.2 percent as Moody’s cut its short-term debt rating. Goldman Sachs Group Inc. closed below $100 for the first time since March 2009.

Costs to protect debt from Bank of America, Citigroup and Wells Fargo rose after the downgrades by Moody’s, which said U.S. support is less likely in an emergency. Credit-default swaps tied to Bank of America added about 40 basis points from yesterday to 375 basis points as of 3:41 p.m. in New York, according to broker Phoenix Partners Group. Swaps on Wells Fargo jumped to the highest since July 2009, climbing 17 basis points to 143 basis points, Phoenix prices show. Contracts on Citigroup rose 19 to 250, according to data provider CMA.

If you were holding long-term bonds, you did great:

This is Operation Twist in action where savers get hammered but speculators do great. At a 3% yield, a 30-year bond holder who is a saver looking for long-term security and yield is losing money daily with the official CPI at 3.6%. Congratulations Chairman Bernanke.

In case no one at the Fed thought about it, more cheap money won’t help the economy. It will help the government though as the cost of funds gets better and better for them. With a few more rounds of QE, then price inflation will make it even better as they pay down their debt with cheaper dollars. Meanwhile, massive amounts of capital are consumed by savers (i.e., destroyed).

Interest rates have been low since 2008 and yet the economy stagnates. Perhaps it isn’t the case that cheap money is what is needed today. If it was, you would think that three years of ZIRP would be a long enough trial period for this idea. So, why does the Fed persist with this failed policy?

Answer: Other than QE, they have no idea what to do since everything they have tried has failed. Next stop: QE3.

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