The Federal Open Market Committee released their monetary policy forecast today. The biggest issue weighing on most economists minds is what decision has been reached with Operation Twist. The bottom line is that the economy is expanding, but employment has slowed, unemployment remains high, and the housing sector is still depressed.
The committee has come to the conclusion that there is no quick solution for the unemployment situation. While jobs are being created, and people are getting back to work, it is a slow recovery. One issue that is curtailing the recovery is that the global economy is still struggling. The European debt crisis is taking a heavy toll on everyone, and fears of default are holding investors back. The glimmer of hope is that inflation is actually lower than expected. And in order to continue to encourage people to borrow money the fed funds rate will stay at 0-.25% at least through the end of 2014. Many economists believe it will go even past that date.
Operation Twist was seen as a success. To keep riding this success as long as possible, the fed will continue to buy treasuries with 6 to 30 year maturities. They will be replaced with treasuries that have maturities of 3 years or less. By swapping, or twisting, the money supply this helps to drive down the long term interest rates. A decrease in long term treasuries is reflected in 30 year mortgage notes. Lower interest rates on mortgages help people to purchase houses and will hopefully strengthen the weak housing market. While the effect of the twist is not substantial, it has helped to bring mortgage rates to new lows.
The FOMC release was basically what was expected by economists. Most thought there would be an extension of Operation Twist and that indeed was the case. As we have seen in many of the latest economic news releases, the economy is very slowly returning to normal. Hopefully this extension will encourage growth. If it does not, QE 3 has not been taken completely off the table as an option.