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The Fed does the 'Twist' and no one decides to dance

The Federal Reserve Bank of New York seal

Jeremy Hobson: So the markets got what they were expecting from the Federal Reserve. The central bank is doing the "twist" -- shifting its investment portfolio in an attempt to bring down long-term interest rates, to make mortgages more attractive, and safer investments like bonds less attractive.

But as Marketplace's John Dimsdale reports, the focus isn't on what the Fed is doing, but rather what the Fed is saying about the economy.


John Dimsdale: Even though interest rates are already at record lows, the Fed is trying to make borrowing more attractive.

Rob Carnell, chief international economist at ING Bank, doesn't think it'll make any difference.

Rob Carnell: I think the real purpose of "twist" was to deliver something to a market that was desperate for some sort of response.

But judging from falling stock prices ever since the Fed's announcement, the markets were not impressed.

The Fed also raised red flags about the economy's future, concluding there are significant new risks. Carnell says that shouldn't be news.

Carnell: I don't think they know anything that we don't know. They may have changed their views slightly since last time they met. But I think the market's well ahead of them in expecting growth to come in on the soft side.

By warning about a bad economy, Carnell figures the Fed is setting up the case for even more intervention in the future.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.
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Why the twist will fail:
1) The Feds signal by interfering with the long term interest rates that this economy is doomed for another decade. Didn't Japan teach them anything?
2) Since the markets returns are near zero or negative for the last five years and near zero returns on interest bearing CDs, I have no choice but to save more money for retirement than to spend my money now which could help the economy.
3) A disaster waits America as baby boomers are forces to live on their principles in their retirement funds instead of their earnings in their retirement funds. Are we going to let millions of eldery starve or force them back into the job market so they can eat?

I think by raising interest rates after 2012 would force people into action before the rates get too high. Instead the Feds outlook has people including me trying to stock-pile cash because we just can't get ahead with zero percent investments.

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