Fed Extends Operation Twist

Stocks were moderately lower going into today's FOMC statement as investors and traders showed caution ahead of the market-moving event. Many expected that the Fed would not enact another round of quantitative easing, but would likely extend the duration of "Operation Twist." Under this operation, the Fed sells short-dated Treasuries and uses the proceeds to buy longer-dated U.S. debt. Ultimately, this is precisely what the Fed did, stating that "Operation Twist" will continue through 2012 with $267 billion in long-dated Treasuries being purchased. Specifically, the central bank will sell securities with remaining maturities of about three years or less while buying Treasuries with maturities between 6 and 30 years. The continuation of the program “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in its statement. The central bank left unchanged its language that economic conditions warrant keeping interest rates "exceptionally low" until at least late 2014. Prior to the statement, there was some speculation that the Fed could extend this view into 2015. Stocks initially sold off after the central bank did not pull the trigger on more quantitative easing, but have since rallied back strongly to session highs. At last check, the Dow Jones Industrial Average was up 36 points to 12,873. Gold and oil have also surged off of their lows with gold sitting near the unchanged mark and oil down a little less than 2% at $82.73. Treasuries initially rose in the immediate aftermath of the statement, but have since reversed those gains. The positive sentiment after the initial sell-off may be likely due to the perception that today's statement has laid the groundwork for a third round of quantitative easing (QE3). The Fed downgraded its view of the economy and said that inflation has moderated. “Growth in employment has slowed in recent months, and the unemployment rate remains elevated,” the FOMC said. “Household spending appears to be rising at a somewhat slower pace than earlier in the year.” In addition, the Fed made it clear to the markets that it would be there to support the recovery if necessary. The Fed said that it is “prepared to take further action as appropriate to promote a stronger economic recovery and sustain improvement in labor market conditions in a context of price stability.” Market participants are viewing the Fed's acknowledgement that the economy has weakened and that inflation has declined as a signal that more quantitative easing at the first sign of trouble is likely.