Image by Getty Images via @daylife  The Federal Reserve is commencing Operation Twist as expected, announcing Wednesday that it will turn $400 billion in short-term U.S. debt into longer-term paper by June 2012. The attempt to flatten the yield curve is aimed at greasing the wheels for an economic recovery that has been fighting uphill, but that may be a losing battle.  Wednesday’s decision – which will see the Fed redirect $400 billion in Treasury holdings with maturities of three years or less into Treasuries that mature in six to 30 years – was probably the most Bernanke could get through a somewhat divided Federal Open Market Committee according to ITG senior economist Steve Blitz.  Blitz, noting that three FOMC members have now dissented in consecutive meetings, believes that the Fed, much like the U.S. economy, is stuck. “Policy reacts to crisis, and we are not in an economic crisis atmosphere,” he says. With limited appetite among FOMC voters for substantial stimulus, Operation Twist is probably about all Bernanke could have done, Blitz argues, though he doubts it will have much of an impact on the economy.  “Borrowing is about confidence,” he says. “If I’m uncertain about growth in my income I’m not going to go get a mortgage.”  That view is echoed by Frank Sorrentino, chairman and chief executive of eight-branch North Jersey Community Bank. “Everyone is looking for that magic bullet, but we are pushing on a string,” Sorrentino says.  Flattening the yield curve might help “if I had a line of people in my lobby waiting for 4% mortgage rates,” Sorrentino quips, but for the unemployed, or a small business owner who has no confidence that activity will pick up, a drop in rates does nothing to increase demand.  To oversimplify and generalize, people who can get a mortgage or a commercial loan don’t want or need one and those who want and need them don’t have the finances or credit score to get one.  “I can’t create the demand,” Sorrentino says, which makes a move like the Fed’s a painful one since it hurts those who make a living on spread assets. (See “What Bernanke’s Operation Twist Means For Banks.”) Banks like NJCB would love to lend at 4% instead of putting money into a Treasury yielding less than 2%, but without qualified borrowers who want those loans the Fed’s move to send rates even lower only hurts.  Why don’t consumers and businesses want to borrow? “It’s a crisis of confidence,” in Sorrentino’s view and even though he believes perception is worse than reality, people are making decisions in an environment with little visibility and a questionable outlook.  Take for instance, a business owner the banker recently met with who laid off workers during the recession but has yet to rehire any. “His son was kicking him under the table talking about their top-line growth being up,” Sorrentino recalls, and meanwhile the client still thought things were terrible. NJCB itself is an example, he says, and is hiring after growing its balance sheet about $100 million last year and putting itself on pace for 30% profit growth in 2011. Those numbers are about taking a bigger slice of a shrinking pie though, not the mark of an improving economy.
Economist, community banker say Fed's latest effort to stimulate economy can't conjure loan demand out of thin air.