Operation Twist

The catch phrase of this week has been "Operation Twist". To get everyone up to speed, Operation  Twist was actually named after the dance craze that was sweeping the nation when the program was first introduced by the Kennedy Administration in 1961. In a nutshell, the program was designed to lower long term interest rates, while keeping short term interest unchanged. The idea behind the plan was that lower long term rates would stimulate business investment and home demand, and ultimately improve the economy. With that in mind,  many economists have been saying that our current recovery will remain in neutral until there is some progress made in the areas of housing and residential investment .

Today, Fed Chairman Ben Bernanke announced the adoption of a new rollout of this plan, with the Fed planning on the purchase of $400 billion in long term treasuries, while rolling out shorter term instruments. Will it work? Well initial response from the market has not been encouraging. The market lost almost 300 pts on the final hours of trade following the announcement as investors digested the news.  In addition. treasury prices rallied with the yield on the benchmark 10-year note falling to a record low 1.86%, while the yield on the 30-year bond slipping to 3.01%.

It is worth noting the decision of the Fed to adopt this program was not unanimous, with three Fed officials ( Fisher, Kocherlakota, Plosser) dissenting on todays decision. 


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