September 22, 2011
Twist and Shout: The Fed, as Expected, Announced Operation Twist
By Liz Ann Sonders
No doubt in reaction to the significant weakening of the economy over the past several months, the Federal Reserve acted as expected and announced what’s known as “Operation Twist” (OT). The goal of this program, first instituted in 1961 and indeed named after the dance popular at the time, is to lengthen the average maturity of the Fed’s balance sheet. The result, ostensibly, will be to lower longer-term borrowing rates, including mortgage rates.
Key points
* The Federal Reserve announced “Operation Twist,” which was largely expected.
* The goal is to further reduce borrowing costs and push money via lending out into the real economy.
* Whether it will work is the big question … because high interest rates are not the economy’s problem.
The details
Specifically, the Fed will buy $400 billion of US Treasury bonds with maturities of six to 30 years through next June. Over the same span, the Fed will sell an equal amount of shorter-term Treasuries, with maturities of three years and less. The Fed also announced that it will reinvest maturing mortgage debt into mortgage-backed securities (MBS) instead of Treasuries. This is intended to help reduce mortgage borrowing costs and stimulate additional mortgage refinancings and demand for new mortgages.
Previous item: The End of the Line: Eurozone Crisis Hits Tipping Point
Next item: Schwab Market Perspective: Perception vs. Reality