Business

So What is the Fed‘s New ’Operation Twist?’

The Federal Reserve announced yesterday that it will use more than $400 billion to try to drive down long-term interest rates, make home and business loans cheaper and invigorate the economy.

Analysts said the moves would provide only a slight economic benefit.

The plan the Fed unveiled, dubbed “Operation Twist,“ resembles a program the Fed used in the early 1960s to ”twist” long-term rates lower relative to short-term rates.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative” the Fed said in its official statement according to a recent CNN Money article.

In its statement, the Fed noted that the economy is growing slowly; unemployment is high and housing remains in a prolonged slump.

“This is a measured response to weak economic conditions,” said David Jones, head of DMJ Advisors and the author of four books on the Fed.

“The Fed is still trying but it can only do so much,” he said in the AP report.

“I don‘t think it’s going to help,” said Michael Sansoterra, portfolio manager at Silvant Capital Management. “The issue is we need to spur jobs,” he said. “And encouraging corporations to hire workers is out of the Fed’s hands.”

Under its plan, the Fed will extend the average maturity of its holdings from six to eight years. The Fed has directed the New York Fed to buy Treasurys with remaining maturities of six to 30 years, and to sell an equal amount of securities with maturities of three years or less.

According to the AP, the action the Fed announced Wednesday is modest compared with previous steps it has taken. The Fed will not expand its $2.9 trillion holdings; it is just “re-balancing them.”

It will sell the $400 billion of its shorter-term Treasurys to buy longer-term Treasurys by June 2012. In addition, it will reinvest principal payments from its mortgage-backed securities, to help keep mortgage rates at lower levels.

“Operation Twist may not provoke the hawks on the FOMC [The Federal Open Market Committee], and it does not antagonize those members of Congress who are concerned about potential inflationary pressures from further expanding the size of the balance sheet,” said Dana Saporta, U.S. economist at Credit Suisse in New York, in a recent Bloomberg report.

“When you have an economy growing under 1 percent in the first half you probably take every 10th of a percent of GDP growth that you can” through a policy such as Operation Twist, said Roberto Perli, a managing director at International Strategy & Investment Group in Washington, in the same Bloomberg report.

“It’s better than nothing but it’s obviously not going to be a knockout blow or a game changer for the economy,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York.

Fed policymakers announced the move after a two-day meeting. Three members out of 10 dissented from the decision. The three dissenters – Richard Fisher, Narayana Kocherlakota and Charles Plosser, all regional Fed bank presidents – have said the Fed’s policies may be raising the risk of high inflation. They favor giving the economy more time to heal without further government intervention. Republicans leaders have echoed the exact same sentiments.

Since the unveiling of the new economic plan, stocks dropped immediately and then continued to fall. When the Dow Jones industrial average closed yesterday, it ended down about 283 points.

Radio personality and conservative commentator Rush Limbaugh had his own practical analysis:

The Federal Reserve has done it. It’s essentially QE3. They’re not printing money, but they are going to increase their share of longer-term Treasuries by $400 billion by June of next year. The objective here is to make credit cheaper. They’re trying to lower interest rates even more, including on mortgages. This is not going to work. This is another attempt at stimulus, folks, and it‘s related to Obama’s reelection, there‘s no question that that’s what this is all about.

They’re basically going to buy securities again. They’re going to jack up and goose the stock market, but they are going to do so with longer term Treasuries, in some cases with payouts over 50 years instead of six and ten.

I’m going to call it QE3. I don‘t know if anybody else will go that far yet but we’ll find out soon enough but it’s a boost of the stock market, a boost of Wall Street, campaign donations to Obama no doubt, and an attempt to lower credit even further because this bunch believes if they could just get people to start borrowing money, the economy will revive. They totally miss that that’s not the point right now.

The Republicans begged Bernanke not to do this at the Federal Reserve. They’re going to do it. They’re not printing new money to put into the market. They are shifting money into riskier investments, basically, and trying to bring down interest rates even further.

Whether or not dubbing it “QE3” is accurate, Limbaugh is correct in regards to the methodology and the desired results of Operation Twist (of course, it doesn‘t hurt that he has heretofore been correct in his earlier predictions involving the administration’s actions).

And as for alternatives to this recent move by the Fed, there are some who think there is a better way. According to the Associated Press:

David Kelly, chief market strategist at J.P. Morgan Funds, said the Fed should threaten to raise rates instead of promising to keep short-term rates near zero until the middle of 2013. Why? It would be an incentive to borrow and spend, he says. People looking to buy a house may rush to lock in current record low mortgage rates before they start rising. “Right now they have zero incentive,” Kelly said.

Higher interest rates also drive down bond prices. So the threat of an interest rate hike would likely “kick people out of Treasurys,” he said, and coerce them into the stocks or other investments.

“It‘s like a patient that’s been in the sick bay too long,” Kelly said. “The Fed really needs to tell the economy to get out of bed and walk around. Unfortunately, they keep giving it more and more doses of morphine.”

(The Associated Press contributed to this story).

Comments (69)

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  • 1casawizard
    Posted on September 22, 2011 at 8:40pm

    This sounds like a combination of two games, Operation and Twister. We’ll do the operation and see what happens, maybe the patient dies. Before the operation we‘ll twist these stories around so it’ll sound like the patient lives. When the patient is close to death or dies then the story will be that it was unexpected or unforseeable. This bunch up there don‘t know what they’re doing. Do you want a surgeon like that?

    Report Post » 1casawizard  
    • the hawk
      Posted on September 22, 2011 at 11:38pm

      Gotta stop these banks from borrowing money at 0% interest !
      They can hold on to it and make 2% profit.
      We need to make it so they have to LEND to make profit !

      Report Post »  
    • Detroit paperboy
      Posted on September 23, 2011 at 9:09am

      Our founders warned us about this….. They had seen it before.
      Federal govt — golf ball size
      State and local govt — soft ball size
      Private sector — basket ball size ….. Now its opposite…

      Report Post »  
  • kindling
    Posted on September 22, 2011 at 8:06pm

    Ok, I started reading and NO, doing nothing is WAY BETTER! They just keep trying things they know fail. Even I, a humble farmer, know this will fail and drive the dollar down farther. It is beyond thinking this is anything except an action expressly to cause more distress in jobs and world wide finance and line some politicians or their friend’s pocket. Can we say impeachment! All of them! Every progressive, no matter the party, sex, race, state…..except Illinois of course. They are just bad to the core and will never change. Its their birth right.

    Report Post » kindling  
    • kindling
      Posted on September 22, 2011 at 8:27pm

      i CANT STAND IT MAKE THEM STOP MAKE THEM STOP!!!!!!!!!!!

      Report Post » kindling  
    • 1casawizard
      Posted on September 22, 2011 at 8:46pm

      I’m with you, Let’s start talking Impeachment, NOW.

      Report Post » 1casawizard  
    • MetalPatriot
      Posted on September 23, 2011 at 3:35pm

      IRS needs to audit Bernanke. This guy is one of our country’s greatest enemies…and those whom he answers to. BTW: it ain’t us or the government.

      Report Post » MetalPatriot  
  • jackact
    Posted on September 22, 2011 at 8:06pm

    “Operation Twist’ is actually a term which best describes the arm motion of a gambler when he pulls the lever of a one-armed bandit slot in Las Vegas.
    Bernacke applies this same principal at the federal reserve whenever he prints, at bipartisan whim, another stack of US paper currency to further deflate the value of our hard earned dollars.

    Report Post »  
  • V-MAN MACE
    Posted on September 22, 2011 at 8:04pm

    “To twist” is the etymological base word of another one of Neocon’s favorite words…

    Torture.

    Ben Bernanke and the Federal Reserve is torturing America.

    Abolish the Federal Reserve.

    Report Post » V-MAN MACE  
  • kindling
    Posted on September 22, 2011 at 7:50pm

    Just seeing the picture of that man holding up his hand as though to be swearing to tell the truth makes my blood boil. I don’t know if my heart can take the story behind this. There used to be strict laws against taking an oath and breaking it as soon as your hand is down. Where has our country’s honor gone? Who is watching the watchers?

    Report Post » kindling  
  • hauschild
    Posted on September 22, 2011 at 7:50pm

    Wait ’till Big Ben starts the process to bail out Europe.

    Gitcha popcorn ready!

    Report Post »  
  • TiredTaxpayer
    Posted on September 22, 2011 at 7:31pm

    This is an old plan, I remember it well………from Wimpy in the Popeye cartoons! “I will gladly pay you Tuesday for a Hamburger today.” And now it is a Federal Reserve Policy!

    Report Post »  
  • countryfirst
    Posted on September 22, 2011 at 6:28pm

    Operation TWIST may stand for (Today Whole Investment Stock Tumbles)

    Report Post » countryfirst  
    • TSUNAMI-22
      Posted on September 22, 2011 at 7:48pm

      Unfortunately the stock market will go up….artificially. Every time the true market tries to self adjust, the Feds come in and kick it off balance by printing more money. Soon the currency bubble will pop and that’s when in one fell swoop bread will go to $300 a loaf.

      Buy weapons, ammo, and food NOW before they become too expensive to acquire.

      I liked Gingrich’s answer during the last debate about Ben Bernanke – Gingrich said “I fire him tomorrow!”. They should fire his ass and stick Peter Schiff in his place.

      Report Post »  
    • kindling
      Posted on September 22, 2011 at 8:08pm

      Kind of brings to mind what you do to a rag to get the last drop of water out when washing the floor.

      Report Post » kindling  
  • WithOutGodWePerishAsARepublic
    Posted on September 22, 2011 at 6:24pm

    Interesting how “Operation Twist” came just before a 400 point loss in the Market …?? HMMM ??? Nah..Just a conspiracy theory…I am reading too much into it…Hey if the Fed and BO say we are moving in the right direction and have said so for the past 3 years …just because the nations economies are going down the toilet… just because the dollar is not worth the paper its printed on anymore… just because this was QE3 ..just because China is pulling the wool over everyones eyes or better yet one of the biggest Ponzi Schemes w their currency history ..all this and so much more does not mean there will be an economic catastrophe soon !!

    Report Post »  
  • AnotherCoverStory
    Posted on September 22, 2011 at 6:21pm

    It’s so sad that in a country with freedom of press the truth can be so easily suppressed. Destroying our currency is only part of a plan for those living with their head in the sand.
    http://PalinsDirtyLittleSecret.blogspot.com/

    Report Post »  
  • mwhaley
    Posted on September 22, 2011 at 6:12pm

    These guys are smart. They know exactly what they are doing. They are right on target to collapse this economy. Obama and his wrecking crew are opening a bottle of the finest bubbly at the news of a 400 point drop today.

    Report Post »  
    • TXPilot
      Posted on September 22, 2011 at 6:22pm

      I’m ready for the collapse and war…….hope all of you folks are too.

      Report Post » TXPilot  
  • geonj
    Posted on September 22, 2011 at 6:03pm

    meanwhile, wall street wasn’t impressed. don’t know where it closed, but i do know it dropped 400 points earlier.

    Report Post » geonj  
  • ssanda
    Posted on September 22, 2011 at 5:35pm

    Another fiasco in the making! We can add this boneheaded move to the long list of Federal government tampering with a free market economy that has resulted in disaster.

    For example, in 1996, when President Clinton directed both Fannie Mae and Freddie Mac to open up their lending practices so as to allow more Americans to own homes, who would have predicted that this seemingly magnanimous gesture would fuel the collapse of the home mortgage industry and financial markets in 2008? The Obama Administration solution: the $800B “stimulus” that 15 months later has not only failed to stimulate the economy, but has added another ~1 trillion in debt for no good reason.

    Look at what’s happening to Bank stocks over the past 2 days if you want a snapshot of the effect of this genius move.

    This group of characters reminds me of someone who is willing to fight any battle . . . to the last drop of YOUR blood!

    Too bad this story is going to push Solyndra off the radar screen, because that was a prima facie case for keeping the government out of business decision making, or $16 per muffin-buying for that matter,

    Report Post » ssanda  
    • Brizz
      Posted on September 22, 2011 at 6:16pm

      What story about Solyndra? Haven’t you seen the MRC video? The sad truth is hardly anyone in the media is talking about it, and you‘re kidding yourself if you think they’ll cover Operation Twist/ QE3 responsibly.

      Report Post » Brizz  
  • booger71
    Posted on September 22, 2011 at 5:34pm

    Will the Feds at least give us a reach around?

    Report Post » booger71  
  • TeaPartyPatriot
    Posted on September 22, 2011 at 5:33pm

    bailout bernanke has again cranked up the money printing presses so he can make BILLIONS and BILLIONS more to send to euro-trash banks. He is public-enemy #2 (and we all know who TheONE is.)

    Bailout bernanke and the feckless fed: the gifts that keep on giving, and giving, and giving to Wall Street from the wallets of Main Street.

    Bailout bernanke and his feckless fed will do everything they can to help re-elect OBOZO The Clown and that includes keeping rates at zero and continuing to ignore inflation and the many asset bubbles their irresponsible actions create – all of which cause great harm and suffering to average middle class and poor Americans.

    Aside from helping obozo, the top priority of bailout bernanke and his feckless fed is to ENSURE MASSIVE MULTI-BILLION DOLLAR PROFITS FOR BIG BANKS and WALL STREET CRONY CAPITALISTS, especially their masters at Government (Goldman) Sacks-full-of-money. More profits = more crony capitalist campaign contributions to “YOU LIE!”.

    ABOLISH THE FED – and put bailout bernanke in the unemployment line along with the millions and millions there because of his and obozo’s fiscal and economic failures

    BAILOUT BERNANKE INSANITY: Repeating the same FAILED policies and actions over and over again because he has NOTHING better.

    Report Post » TeaPartyPatriot  
  • Kyborn1930
    Posted on September 22, 2011 at 5:31pm

    We Americans MUST REMAKE America. The current economic system was adopted during the Wilson Administration at a time when bankers wanted the government to “smooth-out” the extremes of inflation and deflation. Now is the time to listen to Ron Paul and abolish the Federal Reserve System and have the U.S. Congress establish a national bank managed by the House of Reps. If the House of Reps would run the national Bank we could ABOLISH ALL FEDERAL TAXES and issue money to pay all federal bills and salaries. LEAVE THE PEOPLE TO KEEP ALL OF THEIR EARNINGS. NONE FOR TAXES!!!

    Report Post »  
  • Any_One_But_Obama
    Posted on September 22, 2011 at 5:31pm

    World Bank Chief just came out and said that the World is in Danger… If he is saying it, prepare to be scared: http://www.americanparchment.com/video/2011/sep/world_bank_danger.html

    Report Post » Any_One_But_Obama  
    • commonsenseguy
      Posted on September 22, 2011 at 5:39pm

      but the same nitwits called glenn a fear monger for telling people to get prepared and now look, what a bunch of fear mongering,lowlife suck sucking commies. so i wonder what they mean by the world is in danger,or could it be that the world be in danger when their only means of support is totally bankrupt, yep. i guess we are in a total s@@t hole of danger.

      Report Post »  
  • Blaine45ACP
    Posted on September 22, 2011 at 5:29pm

    The Dip***t knows he’s toast, and wants to do as much damage as possible while he has time.

    Report Post »  
  • commonsenseguy
    Posted on September 22, 2011 at 5:28pm

    i just wonder if the fed ask europe and the other countries if this was a good idea, because they have tried this and now look, this is one of the last steps,that will lead to the collapse of the dollar and this will make obama and the democommies happy, { maybe they can invite wiener and chris matthews over and have a thrill of a wiener } this is also one of the last steps to total communism, monetizing of debt is some thing that ahs already happened,and now with so few options left , we are really screwed, but obama,soros and the democommies are just giddy,with the destruction of our beloved country, make no mistake,cass susnstien has a lot to do with this also,with his communist regulations { what is his saying, if you can’t convince them,regulate them into line } something like that,either way a communist. this is all palned out and they are trying to seat the republicans up far a fall, either way the republicans are going to lose,with these commies controlling everything,

    Report Post »  
  • SpankDaMonkey
    Posted on September 22, 2011 at 5:27pm

    .
    They say driving down, but it feels like their shoving something up my…………….

    Report Post » SpankDaMonkey  
  • Ironmaan
    Posted on September 22, 2011 at 5:18pm

    Once inflation begins to get out of control, THE TWIST will make it even harder for the Fed to regain control. Gold dropped a bit today because of margin calls and the need to raise cash, but the uptrend for gold is unbroken. Its a buying opportunity for gold. Get some. http://guerillatics.com

    Report Post »  
    • avenger
      Posted on September 22, 2011 at 5:22pm

      total fkng scam to rob more of your $$$ !

      Report Post »  
  • Countrygirl1362
    Posted on September 22, 2011 at 5:17pm

    More inflation here we come. The poorer the people get the more control the government has.

    Report Post »  
  • NHABE64
    Posted on September 22, 2011 at 5:09pm

    Oh, I thought Operation Twist was a group of WE THE PEOPLE twisting the heads off these f-a—- politicans that have betrayed America and all that is good. I would have enjoyed THAT kind of Operation Twist.

    Report Post »  
  • Ron Staiger
    Posted on September 22, 2011 at 5:07pm

    Which should we jettison first- the Fed or the UN?

    Report Post »  
    • I.Gaspar
      Posted on September 22, 2011 at 5:10pm

      Might want to start with the Senate.

      Report Post »  
    • ProbIemSoIver
      Posted on September 22, 2011 at 5:19pm

      Wasn’t Obama looking to get about 400 billion to stimulate the economy ??? hmm…

      Report Post » ProbIemSoIver  
  • randy
    Posted on September 22, 2011 at 5:04pm

    Idiots

    Report Post » randy  
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