Fed increasingly likely to launch Operation Twist

On balance, we still think that the acceleration in core inflation will prevent the Fed from undertaking a third round of quantitative easing, even after the disappointing August payrolls figures. The related proposal to buy longer term securities at the same time as selling shorter dated assets, however, is an intriguing alternative. We think there is now a good chance that the Fed will put what has been dubbed Operation Twist into action at the next FOMC meeting later this month. It might be successful in driving long-term Treasury yields a little lower, but we don't expect it to have any significant impact on the wider economy because, with 10-year yields already close to 2%, the cost of borrowing is not the problem.