Fed to shift $400B in holdings to boost economy ("Operation Twist II")

[FBaggins]

The Federal Reserve says it will sell $400 billion of its shorter-term securities to buy longer-term holdings, its latest effort to boost a weak economy.

The Fed's move to rebalance its $2.87 trillion portfolio could lower Treasury yields further. Ultimately, it might reduce rates on mortgages and other consumer and business loans. Fed policymakers announced the move Wednesday after a two-day meeting. Three members dissented from the decision.

Many analysts have said the shift in the Fed's portfolio could provide modest help to the economy by reducing borrowing costs and perhaps raising stock prices. Others say it won't help and warn that the move could escalate inflation.

...snip...

Expectations that the Fed would expand its holdings of long-term securities, along with fears of another recession, have led investors to buy up U.S. Treasurys. Treasury yields have dropped in response. Once the Fed announced last month that it would expand its September policy meeting from one to two days, economists have anticipated some new action from the Fed. Chairman Ben Bernanke had said the Fed was considering a range of options.

http://finance.yahoo.com/news/Fed-to-shift-400B-in-holdings-apf-96033563.html;_ylt=ArJpLuGj.JchyvZ5m7v6gN.7YWsA;_ylu=X3oDMTE1Z2dvam12BHBvcwMzBHNlYwN0b3BTdG9yaWVzBHNsawNmZWR0b3NoaWZ0NDA-?x=0&sec=topStories&pos=main&asset=&ccode=

[mike_c]

1. pissing into the wind....

I mean, how much effect can they have on long-term interest rates when interest is already damned nearly nonexistent? This sounds like desperation, to me-- like they're just pulling random tools out of the toolbox to see whether any of them will drive a nail if they hit it hard enough.

[FBaggins]

2. Look to Japan

They can still go lower.

Which is different from agreeing that it's the right thing to do.

[JuniperLea]

8. Even just 1% on a $300k mortgage...

Would leave you with a lot of extra spending cash in your wallet.

Spending is the only way to increase demand for goods and services; an increase in demand for goods and services is the only surefire way to increase job creation.

[mike_c]

10. as I understand it this fix is not intended for mortgage borrowers and such...

...although I suppose there's a chance some of the savings might "trickle down." Instead, isn't this designed to stimulate inter-bank lending and commercial paper? As I understand it, Fed interest rates for such loans are already at historic lows, only a fraction of one percent. The "twist" is to lower interest rates on those notes to near the same rates as short-term notes, but we're only talking about a further fraction of a percent. It's hard to imagine that having any impact on mortgage costs, although I suppose the hope is that it will make more mortgage (and other credit) available if banks and other businesses "perceive" a more fluid money supply.

I don't think it will accomplish much, frankly. And if it does accomplish something, it's more likely to be little more than another credit bubble in the long run.

[JuniperLea]

11. aaaaiiiiiiiieeeeeeee....

Billions in mortgages are tied to the Fed rate + some amount... if the Fed rate is lowered, everything tied to it will be lowered. Including MY mortgage... which went from 5.75 to 3.25 in the past year thanks to the Fed lowering the rate. It has saved me a ton of money... money that has been spent... hence money that has helped to stimulate the economy.

[mike_c]

12. here's the NPR commentary that led me to think otherwise....

http://www.npr.org/blogs/money/2011/09/21/140643696/operation-twist-explained-in-4-easy-steps

The interest rate on 10-year Treasuries is 1.95 percent. This is crazy low. It's lower than inflation. But the Federal Reserve may be about to push the rate even lower.

(snip)

The term "Operation Twist" comes from the early 1960s, when the Fed tried something similar. (It's named for the Chubby Checker hit.) It may have had a small effect — one recent study found that it drove down the interest rate on Treasury bonds by 0.15 percentage points. But the effect on mortgage rates was smaller, and the effect on corporate borrowing costs was tiny.

What's more, interest rates are already super low. And it's clear that the economy has lots of problems that lower interest rates alone can't solve. Fed officials know this, but there's not much they can do about it. All they can do is keep trying to lower interest rates.

Other writers were saying this morning that THIS twist should be even less effective than the last because markets have already been expecting it. Still, as you say, any relief for consumers, if it reaches them, is a good thing. (And I misremembered how low Treasury rates already are-- I remembered them as lower than the current 1.9 percent).

[DJ13]

3. Interest rates arent the problem

At least as far as the Fed's authority, the lack of consumer lending to spur increased demand is the problem.

Stimulating the producers wont stimulate the economy, that requires stimulating the consumers.

[FBaggins]

4. But consumers tend to be stimulated by cash in their pockets

If you have an ARM or HEL and the rate goes down by 1%... that could put money in your pocket every month.

Better yet, if you still have a steady job and sufficient equity in your home, you could refinance at insanely low interest rates... locking in that monthly savings for years/decades.

[The2ndWheel]

5. Like they did last summer?

Then again like last year?

[FBaggins]

6. Nope.

Last year was an increase in their treasury portfolio... so they created (artificial) new demand.

A few months ago, this ended, but they took existing shorter-term securities that were maturing and used those funds to purchase longer-term securities. Thus creating (artificial) demand for the long end of the curve and reducing demand at the short end.

This move doesn't expand the portfolio or extend to just expiring securities. This actively sells non-expiring portions of the portfolio to purchase longer-term securities.

On edit - Oh wait! I missed the Chubby Checker connection. Well done.

[Turbineguy]

7. Big argument on CNBC

Teabagger and prize-goof Santelli talked about the letter the GOP sent the Fed. Tyler Mathisen came back with facts about the Fed and said that when it came to economics he trusted Ben Bernanke a lot more than Eric Cantor.

It was heated. Maria Bartiromo cut it off.

[banned from Kos]

9. Santelli raved about the book "Creature from Jekyll Island" on air once

by the known anti-Fed crackpot child actor Griffin.

Same book is a laughing stock among economists.