Forget the Fed — It Won’t Matter Until 2013

Don't expect anything with punch to come out of the FOMC meeting

     

“Operation Twist” Just a Distraction

Just about the only thing the Federal Reserve can do is the so-called “Operation Twist” of the 1960s that has been making headlines. The effort will involve twisting the yield curve, swapping shorter-maturity government securities for longer-dated ones.

The Fed theoretically will sell its debt with a maturity date of less than three years and buy mostly seven- to 10-year notes — lowering long-term borrowing rates to encourage mortgage refinancing and other borrowing. The program could range from $200 billion to $700 billion.

It’s a novel concept. But will it work?

Like QE2, it could just be the Fed spinning its wheels to avoid looking like it’s doing nothing. Other kinky ideas have been floated as possibilities, but the bottom line is that they are all extraordinary measures — and most are untested or suspect in their impact on the broader economy.

Will There Be Fireworks?

So with a lack of options for policies that actually have punch, investors shouldn’t expect anything new or interesting today.

The only question is whether the Fed will continue to keep up this act or whether we might see more internal squabbles. That’s going to be the real news.

The FOMC had three dissents to its Aug. 9 statement signaling rates might stay near zero for two years. The quantitative easing issue also is divisive.

To top it all off, inflation fears are front-and-center after packaged foods giant ConAgra (NYSE:CAG) reported disappointing earnings — including a 42% drop in quarterly profit thanks to a 15% jump in input costs. Other earnings reports in the coming days might tell a similar story. There was heated debate over the last round of Fed purchases as some warned of a steep spike in commodity prices caused by QE2 that had no real impact on growth. Some talking heads might reopen these old wounds tomorrow to make political hay or offer up juicy soundbites.

But beyond this soap opera of Fed infighting, the news of the day is likely to be more of the same: low rates, a stagnant economy and little the Federal Reserve can do to change things.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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