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THE FED WEIGHS THREE POLICY OPTIONS

According to the latest from Jon Hilsenrath at the WSJ (widely acknowledged as being Ben Bernanke’s journalist of choice to communicate with the public) the Fed is now considering three different policy choices:

1) Operation Twist – “One step getting considerable attention inside and outside the Fed would shift the central bank’s portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.”

2) Cutting interest on reserves – “A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.”

3) Language alteration – “A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.”

As I’ve previously discussed, the last two options are weak and won’t do much if anything. Especially considering the Fed’s big August announcement with regards to rates staying where they are until 2013.

Operation Twist is more complex. The only way it can really “work” is if they target a specific rate on long bonds. I don’t think they’ll do that (see here for more). More likely, they’ll announce a QE2 similar program with longer duration bond purchases that target size and not price and the program will be a dud just like QE2 was (due to similar implementation failure problems).

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