Operation Twist: Investors want the unexpected

Federal Reserve Chairman Ben Bernanke is expected to announce Operation Twist Wednesday

NEW YORK (CNNMoney) -- Investors may be expecting Operation Twist, but what they really want: a surprise grand gesture to woo them back into stock market.

For weeks now, investors have been anticipating that the Federal Reserve will announce Operation Twist -- a plan to sell short-term notes and buy long-term Treasuries -- at the close of its two-day meeting Wednesday afternoon.

Twist refers to the attempt to twist down long-term rates, and get some lending going.

But with the U.S. economy sill struggling, investors are hoping for the unexpected. And talk has turned to the possibility of another round of quantitative easing, a bond-buying program that the Fed has already used twice (QE and QE2) in an effort to spur lending.

"The market right now appears to be anticipating a move so investors will buy the rumor sell the fact," said Thomas Sowanick, chief investment officer at Omnivest Group.

That means, if the Fed announces more than Twist, investors will race into the stock market. If the Fed just announces Twist, investors will walk out the door and at least remain wary of risk-taking.

Should the Fed do nothing or something seen as having even less of an impact, such as lowering the overnight rate paid by banks to deposit money at the Federal Reserve, the market could be in for a sharp sell-off before Wednesday's close.

"My concern is that the Fed has done all they can do at this point," said Joseph Tanious, market strategist at J.P. Morgan Funds. "What's Twist really going to do for the markets and economy?"

Indeed, one problem with formally announcing Twist: it quickly exposes the impotence of monetary policy in a global economy that's in turmoil.

The bond market is upside down

Interest rates on benchmark 10-year Treasuries hit an all-time low of 1.87% last week, and have barely budged over 2% for the entire month. That's worse than the height of the financial crisis, when the 10-year yield hit a low of 2.08% in December 2008.

Ahead of the two-day meeting, Fed Chairman Ben Bernanke has been aggressive about putting the ball in Congress' court during public speeches.

Still, even if it's not much, investors want assurances that the Federal Reserve will do something. "Fed can't be seen to do nothing," said Scott Clemons, chief investment strategist at Brown Brothers Harriman.

Twist -- the middle ground of monetary policy -- will be the likely outcome.

The Federal Reserve is also expected to outline what types of bonds it will purchase. Investors aren't entirely sure whether the Federal Reserve will buy 10-year or 30-year Treasuries or a mix of both.

Bond prices have moved down on 10- and 30-year Treasuries. So if the Federal Reserve concentrates its buying in say 10-year Treasuries, bond prices on those notes would move up and yields would move down. 30-year Treasuries would move in the opposite direction, with yields rising on the longer-term bonds.

While it may not be politically palatable, market observers still see another round of quantitative easing as a possibility either now or in the future if the economy remains stalled. "You can't take QE3 off the table," said Clemons.