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Question:


What is “Operation Twist”?
-ClaireLake


Answer:


“Operation Twist” is a variation on the two quantitative easing programs that the Federal Reserve employed to try to prop up the economy and drag it firmly out of recession. Under those programs, known as QE1 and QE2, the Fed printed hundreds of billions of dollars – as our central bank, it controls the money supply, so it can print all it wants – and used the cash to buy short-term Treasury debt. That pushed short-term interest rates nearly to zero.
 
The point of the zero-interest-rate policy and the QEs was to keep rates so attractive that businesses and consumers would borrow more, thereby stimulating economic growth. QE1 and QE2 stimulated demand for financial assets like stocks and especially bonds, but they were less effective in kick-starting the economy. Consumers apparently had too much debt already to aggressively take on more, and businesses were too nervous about domestic and global economic conditions and the direction of policy in Washington to step up their borrowing.
 
With short-term rates near zero, the Fed decided to try something else: Operation Twist. Rather than print more money, the Fed is selling some of the short-term debt that it accumulated with all those dollars printed earlier and buying long-term Treasury bonds. The aim is to push down other long-term rates, such as on mortgages. Rates certainly are coming down; the yield on 10-year Treasury bonds fell to its lowest level ever, about 1.4 percent, earlier this year, and mortgage rates are near record lows too. Just as with the QEs, however, people are unconvinced about the economy’s prospects, and growth remains tepid. Incidentally, the name Operation Twist comes from a dance craze in the early 1960s, when a similar program was implemented.
-Conrad de Aenlle



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