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Wed September 21, 2011
Federal Reserve Confirms It Plans To 'Twist' In Bid To Bring Down Rates
Originally published on Wed September 21, 2011 2:34 pm
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities."
That sentence from a statement just released by the Federal Reserve confirms that the central bank's policymakers have indeed decided to launch what's being referred to as "Operation Twist."
Or, as our colleague Jacob Goldstein explained earlier over at Planet Money, the Fed is selling some of its "medium-term" (in length) bonds and plans to use the money it gets to then buy longer-term bonds.
In theory, that should put downward pressure on longer-term rates — and in turn, on rates for things such as mortgages. The hoped-for result: a boost to the economy.
How much twisting will the Fed do? According to its statement: "The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."
As for the current state of the economy, the Fed says:
-- "Economic growth remains slow."
-- "Recent indicators point to continuing weakness in overall labor market conditions."
--"Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles."
-- "Investment in nonresidential structures is still weak, and the housing sector remains depressed."
-- "However, business investment in equipment and software continues to expand."
-- "Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks."
-- "Longer-term inflation expectations have remained stable."