Fed Sticks With Twist

The US Federal Reserve has said that it will continue with its plans to purchase $85 billion worth of bonds on a monthly basis. The programme, known as “Operation Twist” sees short term bonds sold and longer maturity bonds purchased in a bid to keep down America’s borrowing costs (by swapping short term, higher yield bonds for long term lower yielding bonds). The programme aims to increase liquidity within the financial sector through the purchasing of bonds (which attract commissions, of course) and thereby provide funding to the financial sector which can be lent on to the business community to boost economic activity and create jobs.

The obvious elephant in the room is that direct provision of funds to industry would guarantee that money supply improved, but then the financial sector would have to do without their commission and government could be accused of meddling – heaven forbid.

The Federal Reserve has also left interest rates untouched at between zero and a quarter of a percent. Despite Q1 growth coming in at 2.5%, the Federal Reserve believes that unemployment remains too high for it to curtail its “quantitative easing” measures. The Q1 growth figure was a disappointment to analysts and there is concern that the negative effects of the “Sequester” are yet to percolate through to the economy fully – they only began to bite in March.

Some 7.6% of the American workforce was unemployed in March. Despite the fact that 88000 Americans found work in March, population expansion in the States requires the creation of roughly twice that number to maintain the current level of unemployment – which is significantly above the historic US average. Curbing unemployment is a specific goal of the Federal Reserve, so analysts are expecting that current quantitative easing measures will continue well into the second half of the year.