Economy USA

Questions about the effectiveness of the “Twist” the Fed …

(Reuters) – On Wednesday measures taken  by the Federal Reserve of the United States to lower interest rates in the long run may have limited impact on the main problem facing the U.S. central bank, namely the installation of a long-term unemployment.

Economists are concerned about  the unemployment rate, currently 9.1%, remain persistently high in the United States, the skills of those who are unemployed for a long time is less and less connected to the requirements of world of work.

“The Fed is doing everything it can to stimulate the economy on the demand side but in the present context, ‘all it can’ is not much,” said Mark Setterfield.

“The unemployment rate of 9% was achieved very quickly and since it is stuck at that level,” said Mark Setterfield.

As expected, the Fed announced it would extend the average maturity of 2,850 billion of securities it holds. It will thus be redeemed, by the end of June 2012, 400 billion of Treasury bonds with a maturity of six years to 30 years. During this period, it will give an equivalent amount of bonds with a maturity of three years or less.

WALL STREET SKEPTICAL

This action, to put pressure on interest rates in the long run has been dubbed “Operation Twist” by investors, referring to a similar policy conducted in the 1960s.

Wall Street was hardly convinced by the ads of the Fed, since the major stock indexes fell more than 2%. Beyond supportive measures, investors have mostly retained the bleak picture that the Fed has developed in the U.S. economy.

According to a survey conducted by Reuters among specialists in government securities, market participants estimate that only 15% chance that the “Operation Twist” gives a real boost to the U.S. economy.

On Wednesday the Fed has also agreed  to continue to support the housing market by promising not to reduce the size of its assets backed by mortgages.

But with such a high level of unemployment, more households will consider to reduce debt rather than take out new loans, which should in turn influence economic activity.

In this case, economists like Mark Setterfield think that unemployment will remain high regardless of the level of interest rates.

The Fed itself does not know exactly what to expect, explaining on its website that it is “difficult to accurately estimate” the degree of economic support that the program will bring.

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