All eyes will be on the Fed's FOMC meeting of September 20-21. Considering the confidence of both consumers and business has soured in the face of apparent government dysfunction and seeming increased economic woes, we are in the same camp as the bulk of our peers - the Fed will take some sort of action. The action we expect them to take is what has been dubbed "Operation Twist." As we all know, QE1 and QE2 consisted of the Fed buying Treasury bonds. The bulk of those purchases were in short and medium term bonds. The Twist will essentially be maturity extension of the debt held by the Fed. That is, they will swap their short term paper for longer term debt. Current thinking is that the Fed will use an active approach by selling its holdings in the 2-5 year range and buying paper in the 7-10 year range, with possibly some longer dated bonds being bought as well. This will have the effect of lowering long-term interest rates and providing modest monetary stimulus.
Unfortunately, our belief is that this stimulus impact will be on the low side of modest. As we have noted previously, long-term interest rates are already astoundingly low, thus lowering rates even further will not have a large impact on demand. That is, it will not cause consumers and business to ramp spending appreciably.
Happier news comes from the Index of Leading Economic Indicators. It is expected to register its fourth consecutive monthly gain in August, and the 13th gain out of the last 14 months. Despite sagging stock markets and the aforementioned souring sentiment, this index of leading indicators is not foreshadowing a recession. Anyone interested in learning more about the LEI, please call or email me.
On that positive note, let's see what's happening next week: Tuesday we have the Housing Starts report. Wednesday we have the all important FOMC announcement. Thursday we have the Jobless Claims report.