United States Monetary Policy

United States

Fed launches "Operation Twist" to revive economy

At its 20-21 September meeting, the Federal Open Market Committee (FOMC) voted to extend the average maturity of its holdings of securities in an attempt to rekindle the faltering economy. In addition, the FOMC left federal funds rate unchanged within the historically-low range of 0% to 0.25% reiterating that conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The move, commonly referred to as Operation Twist, is an attempt by the Federal Reserve to bring down long-term interest rates. To accomplish this, the Fed will sell USD 400 billion of Treasury securities with remaining maturities of 3 years or less and, simultaneously, purchase longer-term Treasury securities by the same amount. Lower long-term Treasury yields, in turn, are expected to translate into lower rates in the rest of the financial system, thus helping to make broader financial conditions more accommodative. The move was met with scepticism by the market, as there are doubts about the Fed's ability to further reduce long-term yields and its effectiveness on boosting growth, considering that interest rates are already at very low levels by historical standards. Markets tumbled following the Fed's announcement.


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