The Federal Reserve Launches Operation Twist
Citing information received since its prior Federal Open Market Committee (FOMC) meeting in August, the Federal Reserve indicated at the conclusion of today's two-day FOMC get together that economic growth had remained slow in the interim. The central bank further affirmed that labor market conditions remained weak, that household spending was gaining just modestly, that investment in nonresidential structures was still limited, and that the housing market was staying depressed. There were clearly no surprises in that aggregate assessment.
The central bank also maintained that it continued to expect some pickup in the pace of the business recovery over the coming quarters, but that it anticipated the jobless rate would decline only gradually toward the levels that the FOMC judges to be consistent with its dual mandate to foster maximum employment and price stability.
The Fed also said that there were significant downside risks to the economic outlook, which is no surprise, including strains in the global financial markets. One problem that the FOMC does not anticipate is an undue escalation of inflation in the months to come, suggesting rather definitively that the much-sought-after price stability that is in the Fed's mandate will evolve.
To help foster this price stability and hopefully push down the current 9.1% employment rate--its dual mandate--the Fed indicated that it would purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of six years to 30 years, and to sell an equal amount of Treasury securities with maturities of three years or less. This maneuvering has been dubbed Operation Twist, presumably as an affirmation of the Fed's desire to lower long-term interest rates, by purchasing such longer-maturity securities, while selling shorter-term instruments.
At the same time, the Fed decided to keep the target range for the federal funds rate at 0 to 1/4 percent. The Fed also anticipates that economic conditions--including low rates of resource utilization--are likely to warrant exceptionally low levels for the fed funds rate at least through mid-2013. Once more, the Committee showed some division, as it had at the prior meeting, with three FOMC members, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser not supporting additional policy accommodation at this time. Fed Chairman Ben S. Bernanke, however, managed to secure a majority to vote his way and thus Operation Twist has been put into place.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.