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Bernanke: No QE3

A third round of quantitative easing is out, an extension of ‘Operation Twist’ is in. That’s essentially what Fed Chief Ben Bernanke and the Federal Open Market Committee told reporters today.

Operation Twist is a Federal program through which the Fed buys long-term Treasury bonds and notes and sells short-term Treasurys. It was supposed to expire at the end of this month, but Bernanke and company have decided to extend it until the end of the year in an effort to further stimulate a sluggish U.S. economy. The Fed will buy another $267 billion in Treasury bonds as part of the deal.

That isn’t quite the QE3 some economists have been clamoring for. And the market showed its collective indifference toward Operation Twist this afternoon by pulling back a few ticks. The S&P 500 led the way, falling 0.23% on Wednesday.

Still, the ‘Twist’ extension is a sign that Bernanke and his FOMC pals acknowledge that some action needs to be taken to pump some life into this economy. After months of simply reiterating its intention to keep interest rates near zero through late 2014, this was at least a new method of trying to boost the economy.

By selling short-term Treasurys and buying long-term bonds, Operation Twist is designed to push long-term borrowing costs lower. As a Wall Street Journal article noted, however, the program hasn’t exactly been working as it was intended since its September inception. Big banks have been snatching up the Fed’s short-term debt, compiling $91 in Treasurys due in three years or less. As a result, the banks’ resources are starting to run dry – actually pushing borrowing costs up.

So you can see why the market doesn’t have much love for Operation Twist.

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