FAQ: Operation Twist

at 12:44 PM ET, 09/22/2011


(TAMI CHAPPELL/REUTERS)
I’m hearing a lot of confusion about what, exactly, the Federal Reserve announced yesterday. So here are some questions and answers.

What is “Operation Twist?”

The Federal Reserve will swap $400 billion in Treasuries that come due in three years or less for $400 billion in Treasuries that come due in six years or more.

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Why would they want to do this?

Right now, there are trillions of dollars in corporate reserves sitting on the sidelines. If corporations decided to invest that money in new workers, plants, etc., it would be a huge boon to the recovery. But they’re scared to invest now because the future of the economy is so uncertain. By purchasing long-term bonds, the Federal Reserve is trying to make it less profitable to stash your money in Treasury securities and give investors and businesses an added reason to spend now, when interest rates are low.

Is it likely to work?

What do you mean by “work,” kemosabe? It’s likely to help keep long-term interest rates low. But it’s not likely to make a huge difference in the economy. Among other things, interest rates are already incredibly low, and that’s not persuading private actors to boost their investments. The problem right now isn’t that investing is expensive, but that corporations don’t see many good investments because there’s not much demand.

Is “Operation Twist” the reason the markets are crashing today?

No. The markets had known about Operation Twist for weeks. Almost all of the policy was priced into the market before the announcement. It’s always hard, of course, to say exactly why the markets are plunging, but we think it’s because of worries over European banks, Chinese growth and the dour economic outlook in the United States. See Neil Irwin and Michael Birnbaum for more on that.

Why is “Operation Twist” called “Operation Twist”?

Financial writers like to be cute. The Financial Times’ Gavyn Davies, for instance, wrote about an alternative path the Fed could have taken in which they clearly communicate their intention to attack unemployment until it begs for mercy and called it “Operation Shout.” Get it?

 
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