Golden oldie: ‘Operation Twist’ hearkens back to Chubby Checker-era Fed plan
By Neil Irwin,
It’s not every monetary policy tool that owes its name to a 1960s dance craze.
The Federal Reserve’s decision to try to lower long-term interest rates by simultaneously buying long-term bonds and selling short-term bonds is being called “Operation Twist” on Wall Street.
That is a homage to a 1961 maneuver in which the Fed did something similar, trying to “twist” the yield curve — the line that charts the relationship between the duration of bonds and the interest rates they pay.
And the original Operation Twist was named after the dance that transfixed young people of the era and was made popular by the recordings of Chubby Checker.
In 1961, the Fed was trying to ease monetary policy to end a U.S. recession while not causing an outflow of gold from investors looking to take advantage of higher interest rates in Europe. To deal with the quandary, the Fed and the Kennedy administration aimed to lower longer-term rates without lowering short-term rates.
Currently, by contrast, the Fed is looking to encourage growth at a time when short-term rates are already near zero. Judging that holding short-term bonds is not doing much to keep mortgage rates low, the Fed will sell $400 billion of Treasurys that mature in less than three years and use them to buy bonds that mature in six to 30 years.
The new strategy could just as easily be called a “maturity extension program,” as the Fed has called it in official documents.
But that would deny Fed watchers, financial headline writers and cable channels the opportunity to brighten some otherwise serious reports with such statements as “twist again,” “twist and shout” and “come on baby, let’s do the twist” — which regularly appear now in analyst reports.