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Monday, March 26, 2012

Lets do the twist: Operation Twist err QE3?

The Fed in September of 2011 has implemented "Operation Twist".  It is a policy that started in October of 2011 and will end in June of 2012. The process of "Operation Twist" is to sell out long term Government Bonds for short term Government Bonds. This is an effort to keep the long term Government Bond yield curve lower. It stays consistent with the Fed's overall policy to keep interest rates low. While this policy seems to have merit on the surface, it still is consistent with the overall trend to keep interest rates down. The logic in keeping the Interest rates down is to stimulate the economy by increasing aggregate demand.  The rationale is to keep interest rates low, so that people will borrow money to help boost the economy for businesses, home purchases, etc.

The downside of this method is that it increases the money supply, and this leads to inflation. If people do not believe inflation is here, please check the prices of commodities and food.  Eventually, interest rates will need to rise. Of course, this will have adverse consequences, but the correction must take place for all the egregious spending, bailouts, TARP, and the like.

Here are some links related to Operation Twist:

"Federal Reserve Launches Operation Twist" 

"Operation Twisted Logic"

"The Fed's Long Shot"

1 comment:

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