Main Street is only now getting used to the idea that quantitative easing (QE) has ended. QE was a complicated thing to understand and many people, myself included, had to keep referring back to other resources to make sure we understood it ourselves. QE was supposed to keep interest rates low and help pump extra money into the economy. When it stopped stocks started to fall, but it’s unclear if the two are related.
The Federal Reserve was behind all that work and have since said that they aren’t interested in doing a third round of QE. However, since stocks have struggled this summer and the economy seems to be back on the see-saw of recession, the Fed is considering some new “asset purchases” to help the economy a bit. It’s not quantitative easing, it’s “operation twist”.
Operation Twist is named after the popular dance craze when all the Fed governors were young. The original operation twist actually happened back in the early 60s, however it was ineffective because it wasn’t done for a long enough period of time.
What is Operation Twist?
A true explanation involves talk of the yield curve, but if you don’t already understand that I’m not going to try to explain it. Imagine this though: interest rates on short-term Treasuries are lower than on long term. Just like if you financed a house with a 10 year loan the interest rate would be cheaper than a 30 year loan. The Federal Reserve can influence all interest rates with programs like QE and Operation Twist. The Fed owns a lot of Treasuries because of prior asset purchase programs, but many of them are shorter in duration.
So Operation Twist involves selling some of those short-term Treasuries and buying long-term ones. The net effect will be an increase in short term interest rates and a decrease in longer term ones. While it’s possible to make longer term rates less than short term ones, that isn’t the point of Operation Twist. Bringing all Treasury interest rates, regardless their term, more in line with each other is a process that flattens the yield curve.
What’s it mean to me?
Largely nothing to tell you the truth. But it could lower long term interest rates enough that people decide to sell the bonds they own and buy stocks again. But don’t expect any real change in the interest rate you see from your bank, either in the form of loans or savings and CDs. Nothing that will have a significant impact at least. There could be an effect of short-term interest rates being bumped up could attract foreign money inflows which would increase the value of the dollar. But again I don’t see anything significant happening.
This is mostly just a thing that exists within Wall Street. Investors are expecting Operation Twist to be announced soon. From the perspective of Main Street, Operation Twist is mostly just economic maintenance. But it’s name is so much better than Quantitative Easing. Enjoy some Chubby because I know you’re thinking about it: