Steve Chiotakis: The Federal Reserve meets today and tomorrow, and one big item on the agenda is interest rates. Board members will be talking about a new idea called ‘Operation Twist’ in an effort to fire up the economy at a time when the White House and Congress haven’t been able to do much of anything.
Marketplace’s Washington bureau chief John Dimsdale is with us live with a preview of today’s big Fed meeting. Morning, John.
John Dimsdale: Good morning, Steve.
Chiotakis: So what is, exactly, the ‘twist’ supposed to do?
Dimsdale: Well it’s designed to reduce long-term interest rates, and that should make mortgages and loans for big corporate construction projects cheaper.
Chiotakis: Don’t we already have low interest rates, John, and yet the economy is still stuck in neutral?
Dimsdale: You’re right. Interest rates — both long and short — are at record lows already with little benefit for the economy. The problem is borrowers seem to be too afraid to take on new debt.
And that’s why many analysts — such as Roberto Perli at ISI Group — seem to be skeptical that Operation Twist will have much impact. But he says that with the economy in a stall, the Fed has to do something.
Roberto Perli: If you’re the Fed I think you’re going to take every single extra tenth of a percent of growth that you can get. In other words, you don’t necessarily expect miracles from your policies but every little help that you can provide is important because it keeps you away from recession territory.
Chiotakis: So what other options, John, does the Fed have to grow the economy — even by very little?
Dimsdale: A couple other ideas at this two day meeting, including giving banks more incentives to take their money out of the Fed’s vaults, so that they invest those idle dollars into the economy. And then there’s the last resort — the Fed could still consider another injection of cheap money into the system, a third wave of so-called Quantitative Easing — which at least is a less catchy name than Operation Twist.
Chiotakis: We’ll all go dancing. Marketplace’s John Dimsdale, reporting from Washington for us. John, thanks.
Dimsdale: Thanks, Steve.
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