"The Fed's latest action is thought provoking but as far as the markets are initially concerned, disappointing to say the least.

"As many FMs will appreciate UK fund managers M&G who run a substantial bond desk within the Prudential comment on bond related events and developments within the blogosphere through their 'Bond Vigilantes' blog.

"I attach a link in which they assess the possible effect and outcome of the Fed's latest policy action which is considered and thoughtful without rancour or bias. You may wish to share this with our commune.

Enjoy a warm mellow early autumn weekend!

David Fuller's view Thanks for reminding us of a good site and for flagging an entry certain to be of interest to many other subscribers.

Here is the key portion in my view:

However, this is not a conventional world. Hence the Fed might find that Operation Twist may have some unintended consequences.

The flattening of the yield curve caused by the twist, and the pre-emptive shout from Bernanke that rates will be kept low until mid-2013, will damage the banking sector. The flat yield curve and the anchoring of short-term interest rates will reduce the positive cost of carry that banks can earn, handicapping the banking system when the current crisis has the banks at its very epicentre. Additionally, by flattening the yield curve via unconventional policy actions, the leading indicator of economic growth - The Conference Board Leading Economic index - will point to a weaker economy. This might deter business planners who have historically looked at this indicator to assess the health of the economy and cause them to reduce or defer potentially stimulative investment plans. This will act as a drag on growth, precisely what the Fed is trying to avoid.

I definitely agree and also spoke of unintended consequences when Mr Bernanke announced that rates could be kept on hold until mid-2013.


Twist is potentially worse because even if it helps to lower mortgage costs, a flattening yield curve will signal trouble to many.