When Fed Chairman Ben Bernanke said recently that he did not expect The Fed to initiate any additional monetary stimulus, apparently stock traders weren’t listening.
The recent run-up in stock prices was based on conjecture that The Fed would respond to the still-weak economy with major action – perhaps yet another round of quantitative easing.
Instead of announcing quantitative easing, though, the Fed announced the expansion of Operation Twist on Wednesday. Under Operation Twist, which is designed to lower long-term interest rates to stimulate borrowing and investment, the Fed has been selling $400 billion of short-term bonds and using the funds to buy longer-term securities.
The extension through the end of 2012 added another $267 billion in bond sales. The measure is not very controversial, but an extension is also not likely to be especially effective, given that long-term rates are already at record lows.
Bernanke did not rule out further action. If none is taken, the “fiscal cliff” will become a little steeper.