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Written by: Stuart Thomson, Chief Market Economist, Ignis Asset Management. Issued by Ignis Investment Services Ltd. Authorised and regulated by the Financial Services Authority. This article contains the personal views of the author and do not necessarily reflect those of Ignis Asset Management.
Summary
“The Fed has commenced operation twist in greater size than consensus expectations amid a pervasive air of gloom over domestic and global economy. We believe that Twist is an important milestone in the Fed’s journey of balance sheet expansion. It is a necessary step given the poor construction and implementation of both QE1 and QE2. It is designed to lower the term structure of interest rates to levels that are attractive for corporations to increase investment in long-term productive assets and escape the paradox of thrift.
“Companies have been hoarding cash on their balance sheets and investment as a percentage of profits has fallen to multi-decade lows. This reflects corporate liquidity preference in the wake of the credit crunch. This risk aversion will not dissipate in the near-term and particularly when there are concerns over the European Sovereign Debt crisis and the Fed’s own warnings that growth remains slow and that the risks to the outlook are biased to the downside. This suggests that while Operation Twist is an important stimulus, the economic impact of this stimulus will take time to prevail.
“Moreover, whilst operation twist provides an...................... To view our full article Click here
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