FED twists again like it did in 63

The US’s Federal Reserve Board (FED) has attempted to twist the US long term and short term interest rates to help jump start the US economy.FED twists again like it did in 63However there is another twist- this ruse  won’t actually do much to help consumers, borrowers or the housing market.

The Fed will go on a bond-buying spree — again — in an attempt to drive long-term interest rates lower than they already are.

The much-anticipated plan, dubbed Operation Twist by observers, should help push rates lower, boost the housing market, make it easier for consumers and business owners to borrow and help create jobs. That’s the Fed’s theory and intention.

But analysts say Operation Twist barely makes a dent in the problem.

There is plenty of liquidity out there already, and interest rates are already extremely low. Interest rates are not the obstacle to growth.

After a two-day meeting, the Federal Open Market Committee announced it will sell short-term Treasury bonds and reinvest about $400 billion in long-term Treasury bonds by the end of June 2012. It will sell Treasuries maturing in three years or less to buy Treasuries maturing in six to 30 years.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed says in its statement. “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

Operation Twist differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented, because it will not require the Fed to print new money to fund the bond purchases. With Operation Twist, the Fed will simply shift its investments around rather than increase the balance of its portfolio.

Mortgage rates have been at their lowest levels in six decades, but millions of homeowners can’t refinance at the lower rates because they don’t have enough equity in their homes. Many potential buyers, who would like to take advantage of the low rates, don’t qualify for loans or are afraid to commit to a mortgage in a shaky economy.

The Fed said it will try to keep mortgage rates low by reinvesting in mortgage-backed securities as mortgages are paid off and as Fannie Mae and Freddie Mac repay debts they owe to the Fed.

Even if lower rates were the answer to dragging the economy out of the hole, Operation Twist still wouldn’t be enough to get the job done because its impact on long-term rates will be limited, analysts say.

Given the severity of the current crisis and the high unemployment rate, the United States needs the gross domestic product to grow at about a 5 percent to 6 percent pace, but that does not seem to be in the cards.

With so much doubt surrounding the effectiveness of Operation Twist, you may wonder why the Fed chose this maneuver. Simply put, it’s because the Fed had to intervene to show investors that it has not lost control of the nation’s economic situation.

And among the few tools the Fed had left in it’s shed, Operation Twist was the least controversial one.

Operation Twist met the least resistance among Fed members mostly because it differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented. Operation Twist will not require the Fed to print new money to fund the bond purchases.

With Operation Twist, the Fed will simply shift its investments around, rather than increase the balance of its portfolio- much like rearranging the deckchairs on the Titanic.

The Fed has more than doubled the size of its Treasury bond portfolio to about $1.65 trillion since the financial crisis started three years ago, and the Fed embarked on a bond-buying frenzy.

With more than 14 million people out of work, the unemployment rate stuck at 9.1 percent and no signs of improvement in the labor market, the Fed felt the pressure to act.

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