Twist and sell

The US Federal Reserve has launched a scheme called Operation Twist in an attempt to reduce long-term interest rates.

Operation Twist involves selling $400bn of short-term bonds (those maturing within the next three years) and using the proceeds to buy long-term Treasury Notes and bonds.

Doing this will result in the interest rates on long-term bonds being reduced.

This course of action is different to quantitative easing as it will not inject any new money into the flagging US economy. It should reduce the long-term cost of borrowing for consumers and businesses.

Many commentators have concluded this morning that Operation Twist will have little meaningful impact on the US economy.

With short-term interest rates already near zero and long-term interest rates very low, it can be argued that reducing long-term interest rates further still will have little real impact.

Investment markets have fallen sharply following the launch of Operation Twist, although this is likely to have been in response to a gloomy assessment of the US economy unveiled by the Fed.

The Fed statement pointed to continuing weakness in the jobs market and “significant downside risks to the economic outlook, including strains in global financial markets.”

Photo credit: Flickr/breahn