It looks like the Fed will replace its expiring Operation Twist with an expansion of the assets it is purchasing under the QE3 programme. We expect that the Fed will use next week's two-day FOMC meeting, which concludes on Wednesday 12th December, to announce that it will begin buying $40bn of long-term Treasury securities each month. It is possible that the Fed could also adopt numerical thresholds for its guidance on how long short-rates will remain at near-zero. Officials have struggled to find a compromise on the exact specifics of those thresholds, however, and we suspect that if the switch does happen, it won't be until sometime next year.
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