The Fed is widely expected to tomorrow announce the latest round of monetary policy tweaking designed to loosen up markets. It has the cute name of “Operation Twist.” Here’s how it works.
The way it works is that in the first rounds called “QE1” and “QE2,” the Fed bought up $2.9 trillion in Treasuries and mortgage-backed securities. In this round, they would swap out most of the short-term assets in favor of long-term ones, by selling the former to buy the latter.
While the costs for borrowing for two years or less are quite low or roughly zero, investing for 10-year terms are “merely” at 50-year lows. The Fed wants to see them even lower. This bending of the yield curve is what gives “Operation Twist” its name, along with the fact that it was first tried out by the Federal Reserve in the 1960’s, when “the twist” was a popular dance.
The idea is that by lowering borrowing costs, businesses will be willing to invest some of this capital they’ve been sitting on and that will stimulate hiring. However, most economists don’t feel this technique, one of the few policy tools left in the Fed’s chest, will have much of an impact on unemployment. Most also don’t feel it will hurt, so hey, why not, splash some water around.
Fed ready to twist [Financial Post]