Financial markets: QE3 or Operation Twist?

Markets ponder Bernanke's next move in the run up to the Jackson Hole meeting.

Global financial markets are poised for the outcome of this weekend’s meeting of monetary authorities in the Wyoming ski resort of Jackson Hole.

Last year’s meeting saw the signal for the second round of quantitative easing (or “QE2” in the economists’ jargon) from US Federal Reserve chairman Ben Bernanke.

There is speculation a third round of printing money (dubbed, inevitably, QE3) is on the way but this is by no means a given, says JP Morgan Australia and New Zealand economist Stephen Walters.

Dr Bernanke “has no real policy options left that he did not use already last year and that with hindsight had no discernable economic impact,” Mr Walters says.

The stimulus did have a financial – as opposed to an economic – impact and one of those was to drive up the value of other currencies, the New Zealand dollar being one of them.

Instead, there is a growing expectation the Fed will perform an updated version of Operation Twist,  a move first performed in the early 1960s and named after a dance craze of the time.

Under that move, which ran between 1961-65, the Fed bought up long-term US Treasury bonds and sold short term bills, in a bid to flatten the yield curve, and thus help the housing market, but to do so in “sterilised” way that did not expand the money supply.

The move was widely regarded to have failed at the time, although recent academic work suggests it was more effective than was realised.

Dr Bernanke delivers his speech at 2am Saturday (NZ time). Last year New Zealand’s Reserve Bank governor Alan Bollard attended the meeting, but the central bank would not confirm whether he would be going this time. However it is understood that at least one senior bank official will be attending.

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