By Paul Quintaro
On Monday morning CNBC reported that in a survey the network had conducted, 70% of respondents predicted that the Federal Reserve would undertake an 'Operation Twist' in the near future. Further, almost 80% of respondents who predicted Operation Twist believed that the Fed would act this week.
The Federal Reserve announced on Wednesday (,
) that it will sell some of its shorter-term assets in order to buy more longer-term assets. Here I assess some of the possible consequences of this move.
By One Eyed Guide: Operation Twist, if undertaken by the Fed, will drive interest rates on longer bonds to new lows and should cause an immediate spike up in gold prices. Operation Twist would consist of the Fed selling short term maturity assets and purchasing longer term assets in an effort to lower long term interest rates.
WASHINGTON — The Federal Reserve is extending a program intended to further lower long-term interest rates, noting hiring has weakened, consumer spending is rising more slowly and the economy needs more support. The Fed will continue Operation Twist through the end of the year.
PIMCO founder and co-CIO Bill Gross spoke with Bloomberg Television's Margaret Brennan today, telling Bloomberg TV that the Fed will likely shift focus to mortgage securities to keep borrowing rates low when Operation Twist ends in June.
By Evariste Lefeuvre: What is operation Twist? Operation Twist is a reference to a policy implemented by the Fed AND the US Treasury in 1961. This cooperative policy mix aimed to lower the long end of the curve without driving short-term interest rates too low. Under the gold standard, FX arbitrage led to gold outflows away from the US and therefore deflationary pressures (an unwelcome outcome in the recessionary context of the time), hence the requirement to put a floor to short-term rates.
This economic recovery has been the slowest post-recession recovery since World War II. Moreover, the Fed has been extremely aggressive in its attempt to stimulate economic growth. And just when it seemed as though the Fed had used every available tool in its monetary policy toolbox, they introduced Operation Twist. Operation Twist equates to the Fed selling shorter term bonds and buying longer term issues. The intent was to increase prices on longer term bonds, hence, placing downward pressure on interest rates which would help keep mortgage rates low and stimulate refinancing activity.
By FXstreet:Unsurprisingly, FOMC members announced no change in interest rates for the foreseeable future, while deciding to add to current monetary easing. Ultimately, the amount of easing and the recent addition of economic benchmarks will undoubtedly continue to spell disaster for the world's safe haven currency.