With the economy in the doldrums and 16% of workers unemployed or underemployed, the magician at the Federal Reserve has a new plan. It’s called “Operation Twist”. Fed Chair Ben Bernanke says he will shift the Fed’s holdings from short term to long term. The theory is the new shift in policy will bring down long term interest rates that will spur the housing market. Even more of what has not worked seems to be the order of the day.
Most economists expect the Fed to announce a plan Wednesday to shift money in its $1.7 trillion portfolio out of short-term securities and into longer-term holdings.
The plan could lower Treasury yields further. Ultimately, it could reduce rates on mortgages and other consumer and business loans, too.
Fed Chairman Ben Bernanke is expected to advocate the move despite criticism from within the Fed and from Republican lawmakers and presidential candidates.
On Monday, the four highest-ranking Republicans in Congress sent Bernanke a letter cautioning the Fed against taking further steps to lower interest rates. Their letter suggested that lower rates could escalate the risk of high inflation.
The plan the Fed is considered most likely to unveil Wednesday has been dubbed “Operation Twist” and dates to the early 1960s. The Fed used a similar program then to “twist” long-term rates lower relative to short-term rates.
This should be of great comfort to the unemployed and all the workers who fear losing their jobs as the economy grinds in a no-growth mode. The jobless can rush to buy still overpriced homes at an even cheaper interest rate. They can make the monthly payments with what?
America’s lost decade rolls on.