An ETF to Win with Operation Twist
The Federal Reserve is continuing its easy money policy to boost the still-weakened financial and real estate sectors, but this policy leads to an unusual opportunity, notes Genia Turanova of Leeb Income Performance.
Two market-moving (or potentially market-moving) events have been in focus over the past week. While the fiscal cliff remains front and center of the market's waiting game, the Federal Reserve's policy meeting, as always, was the event that had both a longer-term and an immediate impact for both traders and investors.
As its Operation Twist program expires at the end of the month, it was widely expected that the Fed would expand its bond-buying program. And the Fed did just that: the FOMC voted to supplement its $40 billion-a-month in mortgage-bonds purchases with the monthly buying of $45 billion in US Treasuries.
In response, Treasury bonds fell. Mortgage rates continued to decline, and are again near record low levels. We also learned something new about the Fed's policies: the FOMC has incorporated employment and inflation targets in its policies.
What does this mean? Theoretically, once unemployment falls to the target level of 6.5%, the central bank will consider raising short-term interest rates again. When can we expect that to happen? Not until 2015, according to current forecasts from the majority of Federal Reserve officials. Therefore, at least until then we should expect to continue to have the near-zero rate policies in place.
The Fed used the "at least as long" phraseology here-so it's even possible that we will see the continuation of current policies for a while longer, even as the unemployment numbers improve.