We had a soft patch in the economic recovery this summer. The situation in Europe was worsening. Many thought we might tip into recession. The Federal Reserve's "Operation Twist" seemed like a good idea. After all, the Fed doesn't have many tools left to stimulate the economy. Selling short-term securities and purchasing long-term securities in a "rebalancing" of the Fed's assets would serve to bring long-term rates down. The question is--would it work? We believe that the plan will not work--technically. But as we have been saying all along, the problem is not that rates are too high. Rates are plenty low to stimulate the economy. The problem is all about confidence. The confidence for consumers to spend and bankers to lend. If the Fed's program gives the economy confidence, that is a good thing.

Why don't we think the Fed's program will bring long-term rates down? Rates were already falling by the time the program was announced because the markets were taking into account an increased risk of recession. As soon as we received some better economic news and better news from Europe, rates rebounded despite the fact that the Fed was now performing their magic. To quote the Borg from Star Trek, resistance is futile. There is no way that the Fed's program will force rates lower when the market is moving the other way. In this respect, higher rates are good news because they are indicative of economic recovery. Of course, we don't want to give you the impression that this rebound has left rates high. We are still at historic lows because the recovery is still weak. The consensus continues to be that as long as Europe's issues don't implode, then the risk of recession is fading. We consider the Fed's operation an insurance policy in case the economy does start to weaken again. As always, the markets will find their own direction.