The Federal Reserve's next policy meeting is a two-day session concluding on June 20. That's just ten days before the Fed's Operation Twist policy -- swapping short-term bonds for ones with longer duration to help keep 10-year and 30-year bond yields low -- expires. Up until recently, few expected the Fed would seriously consider extending Twist.
But what a difference a lousy job report makes. Atlanta Fed president Dennis Lockhart, who is a member of the Fed's policy-setting Open Market Committee this year, told attendees after a speech in Fort Lauderdale, Fla. Wednesday morning that keeping Twist going for longer is "an option on the table."
That may not be a complete 180 from what Lockhart said just a few weeks ago after a speech he gave in Japan. But you could maybe call it a 150. Following remarks on May 21 in Tokyo, Lockhart told reporters that "my own view is that it's not necessary to extend" Twist.
It is important to note that Lockhart never said Twist wasn't an option a few weeks ago, just that he personally didn't think it needed to be extended. In fact, Lockhart said in his Tokyo speech that another round of quantitative easing, or QE3 couldn't be ruled out. However, he didn't seem in love with the idea of more QE.
"QE3 will work under the right circumstances. But I don't believe such circumstances prevail at this time," he said.
But is now the right time? To go from we don't need more Twist, just before Memorial Day to it now being an "option" for policymakers clearly shows that the Fed is feeling pressure to do something as the markets convulse due to heightened worries about a U.S. economic slump and the worsening crisis in Europe.
Investors may get hints about the Fed's thinking today and tomorrow. San Francisco Fed president John Williams, also a voting member of the FOMC, will give a speech in Bellevue, Washington later Wednesday. That will be followed by a speech from Fed Vice Chair Janet Yellen in Boston. Williams, like Lockhart, is viewed by Fed watchers as being fairly moderate when it comes to monetary policy. That is, they are neither too dovish (inclined to favor more stimulus) or too hawkish (i.e. obsessed with inflation.)
But Yellen, like her boss Ben Bernanke, is widely thought to be a perma-dove. So if Lockhart is conceding that more Twist is an option, it seems safe to say that Yellen and Bernanke are also strongly considering it. And as fate would have it, Bernanke will testify on Thursday morning in front of the Joint Economic Committee of Congress about the economy. You can bet that investors will be listening to every word for clues about whether the Fed is leaning toward extending Twist, or in a move that would be even more drastic, launching QE3.
Still, the problem with more Fed stimulus is that it's debatable if it can really work. It may only placate nervous stock market traders and not have any tangible impact on the economy. Keep in mind that long-term rates are already near record lows.
That's why many economists, as well as Fed inflation hawks like my man-crush Dallas Fed President Richard Fisher, are staunchly against QE3. It may now be up to the White House and Capitol Hill, and not the Fed, to fix what's ailing the economy.