Fed Extends “Operation Twist” To Boost Growth

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WASHINGTON, DC (AP) – With hiring sluggish and the economy weakened, the Federal
Reserve aimed to boost growth Wednesday by announcing an extension of a program called Operation Twist.

The program was scheduled to expire at the end of June. But Fed policymakers said they’d extend it until the end of the year. The Fed will sell $267 billion in shorter-term securities and replace them with longer-term bonds.

Here are some questions and answers about Operation Twist:

Q. How does the program work?

A. The Fed sells Treasury securities it owns that mature in less than three years and buys longer-term bonds that mature in six to 30 years. The Fed will also reinvest the proceeds from its mortgage-backed securities that mature into new ones.

Q. What’s the goal?

A. By buying longer-term Treasurys, the Fed intends to lower longer-term rates and encourage more borrowing and spending. Lower rates could also lead more investors to shift money into stocks because they’ll receive less return on their investment in Treasury
bonds. And by reinvesting proceeds into new mortgage-backed securities, the Fed supports the housing market. Without those purchases, banks might issue fewer mortgages.

Q. When did Operation Twist start?

A. In September. That’s when the Fed said it would sell $400 billion of its shorter-term securities to buy longer-term holdings to try to lower Treasury yields.

Q. Has it worked?

A. It’s impossible to know for sure. Many economists think Operation Twist has helped keep rates on mortgages and other consumer and business loans near record lows. But given how low rates already are, few think the extension of Operation Twist will lead to much more borrowing.

Q. Where does the name come from?

A. The Fed took similar steps in 1961, soon after the inauguration of President John F. Kennedy. It first called the program Operation Nudge, because it was intended to nudge long-term interest rates lower. But at the time, Chubby Checker’s record “The Twist” was popular, hitting the No. 1 spot in late 1960, and the name “Operation Twist” stuck instead.

(Copyright 2012 by The Associated Press. All Rights Reserved.)
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