Thursday, September 22, 2011

Federal Reserve launches Operation Twist: The Next Stimulus Begins

The Federal Reserve announced "Operation Twist" Wednesday, a widely expected stimulus move reviving a policy from the 1960's.

The policy involves selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October and ending in June 2012.

While the move does not mean the Fed will pump additional money into the economy, it is designed to lower yields on long-term bonds, while keeping short-term rates little changed.

The intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.

"This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accomodative" the Fed said in its official statement.

It's controversial to say the least, especially following a high-profile letter from Republicans earlier this week, urging the central bank not to intervene in the economy more than it already has.

And even within the Fed, three regional bank presidents, Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, dissented against the decision. Those same three dissented in August.

While the launch of Operation Twist was widely expected, experts still question its effectiveness. Interest rates have already been at record lows since 2008, and that has yet to entice consumers to take out loans. more