Twisting While Europe Burns

Never before has a potential Fed policy tool gathered so much support from the cognoscenti without discussion of objective or metric for success. The policy would only have significant traction if coupled with an aggressive ramp up at the mortgage GSEs. We have advocated for a housing based action for some time but after the significant and wrong headed moves of the conservator on Friday, the chances are diminished.

The ECB needs to embrace a more accommodating stance and expand its mandate as no other robust institution is available. The Fed could hold the line at the present "extraordinary ease" position if the ECB were to grow a brain. The problems in the  European banking  system, though massive, are still workable. Clearly, certain institutions will be shuttered and defaults will occur. Policy needs to be calibrated to those events rather than the present wishful thinking. If markets were encouraged by EZ actions, the term structure in the US would normalize. A Fed focused on twisting would find itself in an unpleasant situation. We remain opposed to Op Twist policy (other fine tuning is less risky). The Fed will have to verbalize any waning support on the FOMC given the term compression already experienced.

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