What You Need to Know About "Operation Twist"

Posted by - Tuesday, September 20th, 2011

Sometime tomorrow, the Federal Reserve is expected to announce a monetary easing program. Instead of QE3, a majority of analysts anticipate “Operation Twist.”

Economists polled in a Bloomberg News survey said the program will probably do little to help the 14 million unemployed Americans...So what exactly will it do?

Essentially, “Operation Twist” would replace short-term Treasuries in its $1.65 trillion portfolio in exchange for long-term bonds. The goal is “to bend the yield curve.” Still, 61 percent of the economist surveyed said the project will probably fail in its ability to improve the unemployement rate (still at a dismal 9.1 percent).

Chief U.S. economist for JPMorgan Michael Feroli has minimal hope for the success rate of this endeavor. He doesn't expect this decision to change the face of our economy, but it is “better than nothing.”

According to Bloomberg:

Feroli estimates the Fed will reduce longer-term yields by about 0.1 percentage point by announcing a swap of $300 billion to $400 billion in Treasuries, selling securities with one to three years remaining maturity, and purchasing mostly those with seven to 12-year maturity

Operation Twist may not provoke the hawks on the FOMC, 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.

The $600 billion Fed program that would buy Treasury securities up to June has faced a lot of criticism from Republicans. House Speaker John Boehner says that plan will simply create asset price bubbles.

Speculation that the Fed will, in fact, favor longer-term debt has Wall Street bond traders stockpiling Treasuries...and they're doing it fast; the fastest pace we've seen in the past four years.

No decision has been finalized, as this is a two-day meeting. Roberto Perli, former economist the the Monetary Affairs Division of the Fed, said the Fed pretty much has no choice but to take some sort of action...no matter how modest. Perli asserts, “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.”

Meanwhile, the macroeconomic environment is greatly suffering because many consumers remain unemployed. The Fed has held interest rates close to zero since December of 2008 and increased the central bank's assets to a record $2.88 trillion this past July. Unfortunately, that didn't do much to help the overall economic outlook: consumer spending remains historically low. And since that spending makes up 70 percent of our GDP, things aren't looking good.

We can only hope that “Operation Twist” gives our economy a little bit of an extra boost until something more long-term comes along...but that may just be a lot of wishful thinking, according to these economists. 


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