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Bernanke dodging QE3 with Twist extension

Threadneedle’s David Chappell says the decision of US Federal Reserve chairman Ben Bernanke to extend 'Operation Twist' was an 'easy option' which doesn't rule out more money printing if the eurozone crisis takes an even nastier turn.

 
Bernanke dodging QE3 with Twist extension

The decision of US Federal Reserve chairman Ben Bernanke (pictured) to extend the short-term bond-buying programme known as Operation Twist was an ‘easy option’ which averts a politically contentious third round of quantitative easing, or electronic printing of money.

That is the view of Dave Chappell, fund manager and US rates specialist at Threadneedle, who said the extension was largely anticipated by the market despite some suggestions Bernanke would introduce a more aggressive monetary stimulus package.

After a two-day meeting of the Federal Open Market Committee, Bernanke this week revealed the multi-billion dollar purchasing programme would be continued until the end of 2012. It was originally launched to a lukewarm market response in September 2011.

Chappell told Citywire this decision was designed to aid the slowing US economy and bolster the signs of recovery in the country’s housing market.

‘An extension of Twist should help to anchor Treasury [US government bond] yields along the curve, which in turn should allow mortgage rates to remain at record lows, improving the chances of a sustained recovery in housing,’ Chappell said.

‘Bernanke would now prefer to step back through to the election and year-end, while gently prodding politicians to start to focus on the impending "fiscal cliff",’ he said in reference to the economic problems that could be caused if tax cuts and spending increases both come to an end at the same time. 

Will there be QE3?

Chappell, who co-manages the Threadneedle Global Bond fund with Citywire A-rated Martin Harvey, noted there had been recent murmurings in the market – from the likes of Pimco bond manager Bill Gross – over Bernanke announcing QE3 or a third round of quantitative easing. In a similar policy to the Bank of England, this sees the Fed create new money with to buy back assets such as Treasuries as a way of injecting money into the US economy and countering the deflationary pressures caused by the bursting of the credit bubble in 2008.

Chappell said market conditions would have to worsen significantly for QE3 to go ahead. ‘Previous QE programs have been implemented with stock markets far lower than current levels. Although economic momentum has indeed faltered in recent months, the S&P, Dow and the Nasdaq have all remained in positive territory. Printing money may fuel stock markets, but it also has potential negative consequences.’

He said the politically-charged debates which surround QE may have swayed Bernanke to ‘wisely’ hold off as well, particularly given November’s looming Presidential election. Chappell, however, did not count out QE3 entirely.

‘If however, the eurozone situation worsens from here, which is likely, and US equity markets get hit hard, then he will have little choice but to reluctantly dust off the printing press once more,’ he said.

Over the past 12 months, the Threadneedle Global Bond fund has returned 20.78%. This is while its Citywire benchmark, the Citigroup WGBI TR USD, rose 19.56%.

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