The Federal Reserve’s “Operation Twist” to curb long-term borrowing costs will probably fail and the U.S. is “on the brink” of relapsing into a recession, said Stephen Roach, non-executive chairman of Morgan Stanley Asia.
“We obviously had a wrenching crisis three years ago,” Roach said in an interview on CNBC today. “QE1 was important in putting a floor under the financial chaos that was unfolding. QE2 failed. Operation Twist will probably fail. QE3 will fail.”
The Fed’s efforts to spur growth have included purchases of $2.3 trillion in securities from December 2008 through June in two rounds of so-called quantitative easing. U.S. policy makers said yesterday they will extend average maturities of Treasuries in its portfolio by buying $400 billion of long-term debt while selling an equal amount of shorter-term securities, dubbed “Operation Twist” after a similar program in 1961.
“We’re certainly on the brink of a relapse, double dip, whatever you want to call it,” Roach said, referring to the U.S. economy. “America is in a Japanese-like situation,” he said, referring to a period during the 1990s when Japan’s economy slipped in and out of recession and grew at an average of about 1 percent a year.
“The unconventional tools that the Fed is trying to convince the markets will work failed in Japan and they won’t work in this economy either,” he said.
Fed Chairman Ben S. Bernanke yesterday maintained a pledge made in August to hold the Fed’s benchmark interest rate near zero through the middle of 2013 so long as unemployment stays high and the inflation outlook is “subdued.” The target rate has been in a range of zero to 0.25 percent since December 2008 and some borrowing costs were already nearing record lows before yesterday’s action.
“What are they going to get out of Operation Twist?” Roach said. “They’re going to take a long-term interest rate which is already at record lows down a little bit more. Is that going to make things better for balance-sheet constrained American consumers?”
“We’ve had no demand growth for 14 quarters from the 70 percent of the U.S. economy -- the America consumer,” he said.