US Federal Reserve extends 'Operation Twist' in bid to boost economy

The Federal Reserve announced on Wednesday ([1], [2]) 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.

On September 21, 2011 in a Federal Reserve Press Release the Fed announced "Operation Twist" purportedly to drive down long-term rates and drive up short-term rates.

Here are a couple of charts from Tim Wallace regarding interest on the national debt. The first chart shows the interest rate is falling as debt skyrockets. Interest Rates vs. National Debt

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.

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. The Verdict