The Fed has it all wrong by launching operation twist and extending the duration of their balance sheet. And the Dow Jones Industrial Average, which fell over 280 points today, seems to agree. The 10 year note is trading at an all time low nominal yield and its real rate of interest is already extremely negative. Lowering the cost of money in the middle of the yield curve will not put equity in the pockets of home owners who are underwater on their property. And it will not save the real estate market or put people back to work either. All the Fed has done is to guarantee that whatever paltry level of capital they have left-if any-will be gone once interest rates rise even slightly.
Bernanke pooped the bed once again by not recognizing that this is a balance sheet recession and can't be solved by creating another bubble in the bond market or by increasing the rate of inflation. In fact, all he has done is to ensure once reality comes to the bond market the pain involved with the adjustment process will be significantly worse. He has also ensured that the exit strategy-if there ever is one-will be much more problematic. Unfortunately, the Fed's new dance will also ensure that inflation will be much more difficult to control.
In addition, Bernanke has now gone on record as being a master prevaricator. He claimed in his statement that inflation pressures have abated through the course of 2011. Here's a quote from his statement: Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable. But the data set from the Bureau of Labor Statistics conflicts Bernanke's contention that inflation rates have moderated. Year Over Year increases in the CPI have gone from 1.6% in January, then rose to 3.2% in April and have increases by 3.8% in the 12 months prior to August. Can you tell me what he is talking about?