Written for First Post
December 24, 2011: Remember Operation Twist announced with much fanfare in the US by the Federal Reserve. If the Fed's real intention was to push up long bond prices it failed, but if the desire was to pump up equity prices, success was  modest.

On September 21, 2011 the Fed announced "Operation Twist" to bring down long term interest rates. The Fed planned to sell short term treasuries and buy long term treasuries with the money. The goal of the operation was to keep money supply neutral, so that no new money would be printed to lower interest rates. As prices of bonds rise their interest rates fall.

As always we will look at what the market did since the Fed announcement to see if it was a success. As with most government intervention programs, Operation Twist did not succeed except for a couple of days. It has failed to give the bond market a sense of direction. The 10 and 30 year treasuries rallied on the week of the announcement and has since failed to make a new high. They have turned volatile. (Click here for the 10-year and 30-year treasuries chart ). The chart on the top is the 30-year treasury bond futures chart and the one below is the 10-year.

The week the announcement was made is marked by a vertical line with the date at the top. The horizontal lines mark the high of that week. Notice that three months after the announcement the treasury prices of the 10 and 30 year maturities  failed to close higher. The 10-year did make a slightly new high only to sell off this week. The 30-year also sold off this week.

Now let's look at the five year treasury bond and US equity index the S&P 500. (Click here for the chart of the 5-year treasury & S&P 500 chart ) The chart on the top is the five year treasury and the one below is that of the S&P 500 future contract. The five year notes closed slightly higher last week, but sold off strongly this week. The equity markets is another story. On the week announcement equity markets fell and has since risen.

So if the real goal of the Federal Reserve was to bring down interest rates, it failed. But if Federal Reserve's goal was to pump up the equity market it succeeded, but only modestly as the market did not rally very strongly. The failure of "Operation Twist" raises the question of what the Fed will do next to pump up the economy. May be nothing as the US economy seems to be picking up with a reduction in unemployment rate, rise in retail sales and housing starts and some other positive numbers. This may be transitory and only the future will tell how the engine of the global economy will do.

However, from the Federal Reserve's point of view there is little it can do as it has used most of it's monetary tools. It can of course keep pumping more money like Japan did but that would fuel global inflation. Also Japanese economy has been in the tank for over 20 years despite printing money. The only rational option seems to be pro-growth US fiscal policy from the White House and Congress.