The Fed delivers a small "something" for the financial markets

06/20/2012 2:04 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

"No matther whether th’ constitution follows h’ flag or not, th’ Supreme Coort follows th’ election returns,” Finley Peter Dunne’s character Mr. Dooley said in 1901.

What’s equally clear today is that the Federal Reserve follows the stock market.

Today the Fed announced it will extend Operation Twist—its program of selling short-term Treasuries and replacing them with longer-term Treasuries in its portfolio--through the end of 2012 to the tune of $267 billion. The existing Operation Twist expires this month.

The extended Operation Twist lengthens the maturities that the Fed will buy from the expiring program. About 32% of buys will be at 8- to 10-year maturities. Another 29% will be in 20- to 30-year Treasuries. At the end of this round of Operation Twist, the Fed’s portfolio will hold almost no debt maturing before January 2016.

On the basis of the Fed’s press release, I’m not sure I see why the U.S. economy needs Operation Twist at the moment. “Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year.”

But I think the Fed knows that global financial markets were expecting something today—especially considering the continued lack of action from the EuroZone. An extension of Operation Twist is the smallest something that Fed can get away with.

Today’s action won’t do much of anything for the U.S. economy, but it won’t cause a financial market sell off either.

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