Fed Taking No Chances; Unveils $400 Billion 'Operation Twist'

The FOMC announced Wednesday that it intends to implement what is commonly referred to as “operation twist.” The FOMC said it plans to purchase $400 billion in 6- to 30- year treasuries and then to also sell and equal amount of shorter-term treasuries (3-year and below) between now and June 2012.

The objective is to put a “twist” in the yield curve by forcing longer-term rates lower and shorter-term rates higher. The move is aimed and encouraging borrowing. The thinking is that since the current ZIRP (zero interest rate policy) in the short end of the curve has not done the trick in terms of job growth, the Fed will now try to push longer-term rates lower.

The FOMC statement said: “To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400B of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."

This was the second consecutive meeting at which Fed Chairman Bernanke has reached into his bag of tricks and done something unusual. Some laud Mr. Bernanke for his creativity and the commitment to do whatever it takes to try and keep the country out of a deflationary spiral.

Others however have an opposing view. For example, respected commodity trader Dennis Gartman stated on CNBC Tuesday that “operation twist is one of the silliest ideas I’ve ever heard.” The argument of those opposing more Fed action is that nothing has worked to date.

In addition, the Fed has come under an increasing amount of scrutiny lately. Just yesterday, the GOP sent a letter to the Fed expressing concern about the ineffectiveness of the Fed’s policies.

Recall that less than a year ago, the FOMC announced it would be spending nearly a trillion dollars on QE2 – a program that ended in June. However, as the recent economic data has shown, job growth and GDP both remains subpar.

The FOMC justified today’s move by reiterating that economic conditions "warrant exceptionally low levels for the federal funds rate at least through mid-2013".

Operation Twist has been used in this country before. However, that last time it was implemented was in 1961, when John F. Kennedy was President.

The good news is the Fed continues to believe things will pick up going forward. "The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.”

Yet, at the same time, the Bernanke Fed recognizes that there is little margin for error at the present time. The FOMC said in its statement, “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."

There were three dissenting votes at today’s meeting.

 

  S&P 500 - Intraday

 

Our Newest Service: The FlashTrading Service Is Now Live! This options trading service is unique in its approach: low capital at risk, frequent market commentary based on the futures markets and real-time options trading, not to mention the options insights you can't help but pick up! Try It Today

 

Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.