Let's twist again, the Fed says, in an effort to bring down long-term interest rates

09/21/2011 2:56 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Way more than expected.

Now let’s see if financial markets like it that the Federal Reserve is moving so aggressively to support the economy or disturbed that the Fed sees U.S. economic growth as so slow that it needs as much of a boost as the Fed can give it.

Today the Federal Reserve announced Operation Twist, an effort to stimulate the U.S. economy by selling short-term Treasury bills and notes out of its portfolio and buying longer-term notes and bonds in an effort to push down long-term interest rates.

Before the 2:15 p.m. ET announcement speculation had ranged from the modest—the Fed would simply roll over maturing short-term debt into longer maturity Treasuries—to the aggressive—the Fed would actively sell shorter-term debt out of its portfolio in order to speed up its buying of longer-term debt. Neither option would have required the Federal Reserve to add to its already hefty $2.64 trillion balance sheet.

In the announced plan the Federal Reserve will buy $400 billion of notes and bonds with maturities of six to 30 years after selling an equal amount of debt with maturities of three years or less. The Fed will also reinvest maturing mortgage debt into mortgage-backed securities. Like most recent Fed decisions this one came with three dissenting votes.

In explaining the rationale for this policy the Fed’s Open Market Committee said “There are significant downside risks to the economic outlook, including strains in global financial markets.” The Fed left its pledge to keep its benchmark short-term interest rate near zero through at lest mid-2013.

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