Fed’s Operation Twist nothing to shout about

Nancy Marshall-Genzer Sep 23, 2011

Fed’s Operation Twist nothing to shout about

Nancy Marshall-Genzer Sep 23, 2011

Tess Vigeland: This week, the Federal Reserve offered its latest stab at fixing the economy. Supporters described it as a life raft. Detractors say it its more like swim floaties. You may have heard the name — it’s called Operation Twist. It harks back to a previous Fed move in the 1960s, when it was also a dance craze. Now it might refer to people twisting their faces in aggravation.

We asked Marketplace’s Nancy Marshall Genzer to join us from our Washington bureau for some perspective. Hi Nancy.

Nancy Marshall Genzer: Hey Tess.

Vigeland: Let’s talk about what exactly the Fed has done here. What is Operation Twist?

Marshall Genzer: Yeah, it’s a nice catchy name for a Fed monetary policy, right? Which is a nice change. The Fed is going to rearrange its portfolio. It’s going to sell short-term Treasury bonds and buy up long-term Treasury bonds. And the idea here is to push down long-term rates.

Vigeland: And by long-term, we’re talking the 10-year T-note?

Marshall Genzer: Yeah. Ten-year Treasury note, and that actually even the 30-year. And that will, hopefully, be followed by things like mortgage rates and long-term loans for small businesses.

Vigeland: Right. Well, why would the Fed want to do this? Who are they aiming it at specifically?

Marshall Genzer: The Fed is aiming at job creators, targeting big investors like hedge funds, also corporations. The Fed is hoping they’ll move away from investments in long-term bonds, because the rate of return is so low. Instead, plowing their money into things that would create jobs: BUilding a new mall, opening a new factory. Now the Fed is also trying to help consumers here. They want to help us refinance our homes, maybe go out and buy a new house. The thinking is that consumers won’t be able to resist super-low mortgage rates.

Vigeland: But the fact is is that interest rates are already historic lows. I mean, we’re looking at mortgages that are sub-four-percent and people still aren’t buying, right?

Marshall Genzer: Exactly. And that’s the problem. People aren’t buying, partly because they’re scared to buy in this shaky economy. They think they might lose their job, or they just can’t get a loan, no matter how low the interest rate is. I talked with Ken Kuttner about this. He’s a former Fed economist, now at Williams College.

Ken Kuttner: Lenders have really become more conservative and re-trenched in terms of their lending behavior. And yes, in the margin, a slightly low interest will help. It’s really going to be a small effect overall in the economy.

Marshall Genzer: And Tess, I asked Kuttner about the overall impact on other types of consumer loans, like rates on credit cards and car loans, for example. He really didn’t see much of a change there. He says the Fed just isn’t aiming at those rates; it’s working more on rates for long-term loans, like I said, things like mortgages. So, really Tess, Operation Twist isn’t much to shout about.

Vigeland: Very nicely done.

Marshall Genzer: You knew I was going to use that line.

Vigeland: Yeah, you were going to get there eventually. Well, anything that has an upside for some people, most likely has a downside for others.

Marshall Genzer: Yeah, some consumers could actually be hurt by what the Fed’s done. Long-term savers, for example. Tess, have you checked out CD rates lately?

Vigeland: No, I haven’t bothered.

Marshall Genzer: Yeah, exactly. I mean, they’re just so low, ti’s not worth it. And now they’re going to be lower still. Also, your rate of return on a bond market mutual fund is gonna fall. And of course, your 401(k) isn’t going to get much of a boost. The market fell like a rock after the Fed announcement.

One thing that’s kind of ironic here, Tess, Kuttner says that one reason Operation Twist won’t have the impact the Fed is hoping for is demand. There’s so little consumer demand out there. We are part of the problem. Investors aren’t gonna build a new mall right now, no matter how low interest rates are because no one’s out shopping. So Tess, we need to go out and shop. Force yourself.

Vigeland: Well, I suppose I could do my part on that score. But of course, I will not be using a credit card.

Marshall Genzer: No ma’am.

Vigeland: No ma’am, right. Marketplace’s Nancy Marshall Genzer joining us from our Washington bureau. Thanks so much.

Marshall Genzer: You’re welcome.

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