When Deepika Padukone twisted at will for the famous “twist” song in 2009 hit Love Aaj Kal, which had some 64 twists, she would not have imagined that a single twist could be worth $400,000,000,000 or 400 billion US dollars. That’s the amount the US Federal Reserve governor said he would spend on his ‘Operation Twist’ over the next nine months.
Ironically, instead of twisting their way up, the US stocks rushed in the opposite direction, burning investor wealth of $424 billion — that’s Twist, plus 5 per cent.
Why does Ben Bernanke think twisting is the best medicine for an economy staring at a ruthless recession and 25 million jobless Americans? And why does the market think that there is a twist in the tale?
When John F Kennedy was the US President, a monetary policy tool was used, wherein long-term rates were cut but short-term rates were left unchanged. This move was dubbed Operation Twist, after the dance craze set off by Chubby Checker song “Let’s Twist Again.”
Bernanke will remake this 60s classic on a much larger scale. By the end of June 2012, he will sell debt instruments that mature in or before 2014. The $400 billion that comes from this exercise will be used to buy longer-term securities. Longer term, for this purpose, could be anywhere between 2014 and 2041.
This is an indirect way of lowering interest rates for long-term loans. Analysts say Fed expects this move to have a snowball effect and lead to a decrease in interest rates on car loans and mortgages.
Besides, lower interest rates will also drive investors from low yielding financial assets to business investments, kickstarting economic activity, eventually leading to higher economic growth.
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But market feels that’s expecting too much out of too little.
Amar Ambani, head of research, IIFL, says: “Fed’s ‘operation twist’ was expected to swing the mood in favour of risky assets. But it ended up doing the opposite. The debt-swap fell short of expectations.” Analysts at Centrum Broking feel it is only a mild stimulus and will not infuse sufficient firepower to improve worsening unemployment conditions. “Unlike the QE2 announced last year, yesterday’s move fails to trigger hopes of re-inflation. While QE2 eventually failed to deliver the recovery it promised, it, along with extension of the Bush tax cut, temporarily created the impression that economic conditions will improve,” Dhananjay Sinha of Centrum Broking said.
“In the wake of worsening European debt crisis since June 2011 and US sovereign downgrade in August 2011, a feeble intervention by Fed will prove highly insufficient in inducing optimism in the markets. On the contrary and converse to QE2, operation twist will flatten yield curve further, confirming the slowdown,” Sinha added.
The twist to the Operation Twist was provided by the US central bank’s assessment of the economic growth, which it said was weak. Most economic parameters like the labour market, auto sales and new mortgages showed little improvement.
No wonder, the Indian market, which has forgotten decoupling and now resigned to twisting to the American music, wiped out Rs 2.16 lakh crore of investor wealth today.