What kind of dance will the Federal Reserve be doing now that it’s renewed its version of the Twist? N.C. State University economist Mike Walden answers.
“Well …, it is called Operation Twist, and what it means is that the Federal Reserve will be selling short- term financial investments and purchasing long-term financial investments.
“Now why are they doing this? Well, their goal is to put downward pressure on long-term interest rates. That is to say that if they go into the markets and they sell their short-term investments and they go and increase demand by purchasing long-term investments, that’s actually going to push those long-term rates down. So it means lower things like mortgage interest rates, lower 30-year interest rates, et cetera.
“And the goals here, I think … as their goal has been over the last three or four years, is to try to revive the economy, particularly … the housing market. So, they would like to see 15-year interest rates on mortgages, 30-year interest rates on mortgages lower.
“Now the problem is … that this is not new. Operation Twist has actually been going on by the Federal Reserve for over a year. Interest rates on long-term mortgages are already very low. Many economists don’t think they can go much lower. So, we don’t really think that this is going to have a major new additional impact on the economy.
“I think instead by reviving Operation Twist, the Federal Reserve simply doesn’t want the economy to go backwards.”Category: Economic Perspective