Stumbling to another crisis?


Operation Twist hasn’t gone down particularly well has it.  It could be that the policy was smaller than expected, it could be that growing political angst has made the idea of further Fed stimulus seem more unlikely, but either way a drop in asset prices and falling inflation expectations isn’t what we want to see following a Fed announcement – especially in the middle of a financial crisis.

I think that the general idea would work, akin to this.  However, for some reason the actual announcement has disappointed markets.

In terms of NZ, our dollar has dropped reasonably sharply following the announcement.  I’m hoping this is because the dollar is seen as an “asset price” and people are just moving out of it because they are less willing to take on risk – given lower than expected accommodation of monetary policy by the Fed. {Update:  In terms of the dollar it seems that comments by Dr Bollard last night also had an impact}

Worst case, the drop in the dollar is a signal of lower export prices.

New Zealand policy makers have done a damned good job the last few years, but its hard for them to do much in the face of incompetence around the world – given that we are a small open economy.