The Global Radar Screen – 9/16/11

Posted September 16, 2011 by CLeahey

[private][private]Overview—Chubby Shows Ben How to Do the Twist This Summer…

Investors focus will shift from the ever-changing (and seemingly) never-ending debt crisis in the Eurozone to the upcoming FOMC meeting. Many investors have been front-running the expected operation twist in which the Fed will sell short-term Treasuries and buy longer-term Treasuries in an effort to keep private borrowing rates low to stimulate housing and investment. This might be less effective than purchasing mortgages and corporates directly with the proceeds of the short-term Treasury sales. But this option seems too much like “fiscal policy” to many on the FOMC, who prefer the Fed to conduct monetary policy with a “pure Treasury” portfolio. And, of course, this is an intermediate step before actually expanding the size (not just the composition) of the portfolio, the long awaited QE3. Ben (“Chubby”) Bernanke risks having four dissents at the upcoming meeting, three hawks plus one dove, who might be tired of the Fed being too timid. No chairman wants to run policy for very long with 7-3 or 6-4 votes. Chubby’s predecessor Greenspan only endured two votes with four dissents. Never did a three vote dissent last more than two consecutive meetings. In a highly charged election year, a continuous vote of rolling dissents could add even more ammo to the critics in Congress and on the campaign trail to kill the Fed.
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