- The “Operation Twist” portfolio maturity extension program has only just gotten underway and already more Federal Reserve policy easing is under consideration. The types of additional easing the Fed has been contemplating fall into three broad categories. We discuss the prospects for each option in turn:
- Forward Guidance – We believe the FOMC is considering making future policy moves more explicitly contingent on its progress toward the Fed’s longer-run employment and inflation objectives.
- Balance sheet manipulations – It appears the Fed is preparing the markets for a renewed round of large-scale asset purchases, this time focusing on mortgage-backed securities. QE3 is looking increasingly likely, perhaps beginning even before Operation Twist is completed in June 2012.
- Interest rate cuts – Cutting IOR from the current 0.25% seems to have slipped lower on the list of likely easing moves.
- QE is probably a necessary component of managing the ongoing restructuring of the global financial system. As the old saying goes, “You ain’t seen nothing yet .”
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS