Let’s Twist Again, Like We Did 50 Summers Ago

The Federal Reserve launched Operation Twist this week. In a nutshell, the Fed will sell $400 billion in bonds with maturities of three years or less, thereby increasing the yields of those bonds. It will then buy bonds with maturities of six to 30 years, thus decreasing their yields. (The yields for long-term bonds are higher than those for short term bonds because long-term bonds involve more risk. See the yield curve here.) The Fed hopes to reduce interest rates for long-term borrowing. (BTW, I was hoping that I would use my Chubby Checker knowledge to get an original headline. Turns out, I did not.) Like a party ruined by a tactless remark, markets freaked out when the Fed said this:
The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.
If the Fed said, “moderate downside risks”, the Dow Jones Industrial Average might not have dropped 391 points yesterday. Closer to the chemical industry, the downside risks are also looking, for lack of a better word, significant. The American Chemistry Council’s report on Weekly Chemistry and Economic Trends, released today, says:
Outside of the United States, preliminary purchasing manager indices indicate that Chinese manufacturing contracted for a third consecutive month and that business activity stalled in Germany. This, combined with the recent evidence of falling commodity demand, suggest global manufacturing may be contracting.
U.S. chemical production increased by 1.7% on a year-over-year, three-month moving average, basis through August. Global production volumes increased 3.9%. Both of those figures are a decline from earlier in the year. There are indicators that bode well for chemical demand. Chemical railcar loadings and new building permits are both up.

Author: Alex Tullo

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