Operation Twist

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Operation Twist is a monetary policy maneuver that involves selling shorter-term assets in order to buy more longer-term assets.

It was announced in September of 2011 that the Federal Reserve would perform such a move. By buying more of the existing supply of longer-term Treasuries, the intention was to nudge the price of those securities a little higher, or move the long-term interest rate a little lower. The hope was by lowering interest rates, there would be slightly more opportunity for households and firms to borrow or refinance and perhaps increase spending a bit.[1]

In 2011, the Fed said that it intended over the course of the following nine months to sell about $400B worth of its Treasuries that had maturity between three months and three years in order to buy securities with maturities of six years or longer.[2]

The expression "Operation Twist" was originally used to describe a plan implemented by the Kennedy administration and the Fed in 1961, and named after a dance popular at the time. The idea then was that the U.S. Treasury would replace some of its longer-term debt with shorter-term obligations, and the Fed would simultaneously sell some of its shorter-term securities and buy longer-term Treasuries.

On May 16, 2012, St. Louis Fed President James Bullard announced that Operation Twist should end according to its original schedule in June 2012. [3]

Some Controversy

The Operation Twist move in 2011 was met with some controversy. A high-profile letter from Republicans urged the central bank not to intervene in the economy more than it already had.[4] And within the Fed, three regional bank presidents, Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, dissented against the decision.[5][6]

On Sept. 27, 2011, Federal Reserve Bank of Atlanta President Dennis Lockhart said the decision to tweak the maturity of the Fed's massive balance sheet would likely have a “modest” impact on helping the economy achieve a better rate of growth.[7]

Research

Some early research (1966) by Franco Modigliani and Richard Sutch from the Massachusetts Institute of Technology (MIT) concluded that the original Operation Twist was not terribly successful.[8]

Similarly, in a 2004 paper, Fed chairman Ben Bernanke downplayed the strategy's significance as a tool for promoting lower long-term rates.[9]

Federal Reserve Bank of San Francisco economist Eric Swanson presented a paper at the Brookings Institution, however, that made a convincing case that Operation Twist did succeed in its goal of modestly lowering long-term interest rates (PDF file).[10]

References

  1. Fed's 'Operation Twist,' Explained In 4 Easy Steps. NPR.
  2. Fed Will Lengthen Maturity Of Securities In Bid To Cut Rates. Bloomberg.
  3. Fed's Bullard-Operation Twist likely to simply end. Reuters.
  4. GOP To Bernanke: No New Stimulus. CNNMoney.
  5. Federal Reserve launches Operation Twist. CNNMoney.
  6. Fed Dissenters Speak Out. CNNMoney.
  7. Fed’s Lockhart: Operation Twist Should Have ‘Modest’ Impact. WSJ.com.
  8. Paper: Innovations In Interest Rate Policy. JSTOR.
  9. Paper: Conducting Monetary Policy At Very Low Short-Term Interest Rates. Federal Reserve.
  10. Paper: Let's Twist Again. Eric Swanson.