The Fed’s monetary policy accommodation in the form of two rounds of quantitative easing (QE) and the current Operation Twist (OT) that is underway have provided support for economic activity and helped to stabilize the financial system. Operation Twist will be completed as of June 2012. QE1 and QE2 led to higher Treasury note yields followed by a reduction in yields as the two programs were completed (see Chart 1). Operation Twist has succeeded in establishing a firm floor for rates, but on the expiration of the program as of June 2012, the future is uncertain.

If history is a guide, yields would trend down upon the expiration of Operation Twist, assuming soft economic conditions. However, if economic conditions are such that a self-sustained momentum supported by bank credit emerges, then higher yields would prevail. Headwinds from Europe present a challenge to the performance of the U.S. economy. Of the stronger economies in Europe for which factory production data are available, the numbers are disappointing. Factory production fell in Germany (-0.1%), France (-1.2%), Sweden (-5.6%), Norway (-0.7%) and United Kingdom (-1.1%) during February. Although the latter three have not adopted the euro, the extent of the weakness of each of these economies warrants close tracking.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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