“There is a greater chance of the Fed implementing what is known as ‘Operation Twist ‘(named after a maneuver first used in the early 1960’s) by which it would sell short-term government bills and buy long-term government bonds in an attempt reduce long-term Treasury rates,” Kelly wrote in a weekly outlook. “However, with real long-term interest rates already at their lowest levels in decades, it is hard to argue that anyone is hesitating to borrow money today because rates are ‘just too high,’ and thus hard to see how this could stimulate the economy.”
If the Fed disappoints and doesn’t announce any stimulus, stock ETFs could take a hit this week. There are also worries that the central bank may be pushing on a string.
“Another possibility is that the Fed could cut the interest it pays banks on reserves held at the Federal Reserve, thus encouraging them to increase lending. However, since the rate on reserves is just 0.25% today, it’s unlikely that such a reduction would cause a huge change in bank behavior,” the JP Morgan Funds strategist added. “The truth is that the economy is suffering from a lack of confidence rather than a lack of liquidity and ever-more-desperate attempts by the Fed to increase the latter are undermining the former.”
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