There is speculation that the US Federal Reserve will announce a new stimulus measure which they call “Operation Twist” following the conclusion of its monthly meeting later today. This new policy would consist of changing (“twisting”) the composition of the government bonds held by the Fed.
If the FOMC decides to introduce Operation Twist, it would result in replacing short-term Treasuries in its $1.65 trillion portfolio with long-term bonds in an effort to lower interest rates on mortgages, auto and consumer loans.
By lengthening in the average duration of bonds in its portfolio it would consequently bending the yield curve, and in turn lower rates. A similar policy was undertaken in 1961.
“Operation Twist in the ‘60s wasn’t found to be a great success either,” said Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home- price index.
Operation Twist may not make a significant impact according to 42 economists that were surveyed about the plan. In an article on Bloomberg.com, 61 percent of economists said that the plan will fail in its attempts to improve unemployment and 15 percent predicted that it could actually be harmful to the nation’s recovery.
“The Fed’s actions probably won’t help housing in a meaningful way,” said Hunter, chief economist and national director of consulting at Metrostudy, a Houston-based housing research firm that provides data to 18 of the 20 largest U.S. builders. “The level of mortgage rates is not a major factor. Rates are at extremely attractive levels.”