Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

The Fed's twist won't make the economy dance

September 21, 2011: 4:03 PM ET

Long-term interest rates are already low and they aren't doing much to spur economic growth. How will 'Operation Twist' change that?

Ben BernankeFORTUNE – Throughout the economic downturn, the Federal Reserve has been torn by two responsibilities: Keep prices stable and institute policies to help the economy grow.

Today, it appears officials are more worried about the troubled economy than inflation. In another unconventional move to boost an economy on the brink of a second recession, the Federal Open Market Committee said it would raise its share of longer-term Treasuries by $400 billion by June 2012.

Not all members agreed on this. Worried about inflation, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia voted against the program dubbed "Operation Twist," similar to a move made with mixed results in 1961.

However, worries have been running high inside the central bank about joblessness and weak economic growth. The unemployment rate hovers at a high 9.1% and is expected to decline only gradually. And it doesn't help the dissenters' inflation argument when absolutely no jobs were created in August.

The idea behind Operation Twist is to hold long-term rates down further by buying up long-term debt. This would ideally allow people to get cheaper mortgages and companies to finance their operations at better rates.

But there's more than one twist here. Fed officials have tried bold moves similar to this before. In June, the central bank completed a widely criticized program of bond purchases that essentially pumped $600 billion of newly printed money into the financial system. It sparked fears of inflation and, even though it helped send mortgage rates to record lows, it didn't spur home purchases or refinancing.

Today's move is technically different in that it aims to ease financial conditions without raising the amount of money circulating in the financial system. While it might allay inflation fears a bit, lowering long-term rates likely won't help the overall economy much. After all, Freddie Mac's latest survey shows the average rate on 30-year, fixed rate mortgages is at 4.09% -- the lowest level in more than 50 years.

Admittedly, the Fed has shown its commitment to keep the economy chugging along. And right now, with the ongoing debt crisis in Europe unnerving investors worldwide, the U.S. needs all the support it can get.

But the Fed is running out of out-of-the box prescriptions. It can only do so much. Isn't it time for Congress to act?

Join the Conversation
About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.