Fed Tries 'Operation Twist' to Spur Growth

Move intended to hold down long-term interest rates
By Newser Editors and Wire Services
Posted Sep 21, 2011 2:20 PM CDT

(Newser) – 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. (MarketWatch has more details on the strategy nicknamed "Operation Twist," so-called because in Wall Street lingo it "twists the yield curve.") The Fed also said it will reinvest its holdings of mortgage-backed securities, which would help keep mortgage rates at super-low levels. The Fed had previously reinvested the interest and principal into Treasury purchases.

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"The actions the Fed has taken are helpful," says an economist at DB Advisors. "They will help hold down long-term rates, but they're no panacea." Fed policymakers announced the moves today after a two-day meeting, with three members dissenting. Stocks fell immediately after the announcement, and the yield on the 10-year Treasury note tumbled. Earlier, GOP lawmakers asked the Fed to show restraint. (Read more Federal Reserve stories.)

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