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FOMC Meeting: Fed Begins Operation Twist

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The Fed finished its FOMC meeting this afternoon, and in its statement, Operation Twist was announced. This is the informal name of the policy in which the Fed rotates its balance sheet from short-term interest rates to long-term. Here's an excerpt from the FOMC statement:

Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

The Fed's mid-2013 pledge to keep rates near zero continues:

economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The same three inflation hawks on the Fed dissented like they did in the last meeting. As before they were easily outvoted by the other seven members:

Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

After three years of historically low rates, I guess the Fed thinks more downward pressure on rates will somehow fix the economy. This Forbes article describes the problem with the Fed's thinking:

The move was widely anticipated, but the view of the potential impact is much less certain as many doubt the rate on a 10-year Treasury – 1.92% before the FOMC statement – is the problem stifling economic growth.

Unfortunately, there will probably be an impact to bank deposit rates. In the last few weeks we have seen banks and credit unions cut their long-term CD rates. The latest cut came at Discover Bank which cut its 10-year CD APY from 3.00% to 2.50% on Monday. There were hopes that this Operation Twist may help short-term deposit rates. With the Fed funds rate stuck at near zero until mid-2013 and with short-term Treasury yields near zero, I have a feeling we will see more downward moves on the long-term yields than upward moves on the short-term.

Future FOMC Meetings

There are just two more FOMC meetings scheduled for 2011: November 1st-2nd and December 13th.


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Comments
48 comments.
Comment #1 by Anonymous posted on
Anonymous
Anyone want to join me in a loud SCREAM!  Even when you know the ground is cracking under you, it still terrifies you when it actually opens up and swallows you!  I can't believe these bozos actually went ahead and did this "twist".  Historically it was a failure for was it Japan??  Don't they bother to read what the bad results of it have been?  I really dread 2012 now.  I really, really dread seeing what is being allowed to happen to our country financially!

19
Comment #3 by Anonymous posted on
Anonymous
Doesn't this mean that short term (6 years and less) rates will rise as

long term rates fall?  If so, doesn't that mean that banks/credit unions will

have to pay more for our deposits?

1
Comment #4 by scottj posted on
scottj
I don't dread 2012, i'm looking forward to getting dumbo out of office. Republicans sent a letter to Bernanke opposing operation twist my.... and he ignored it. Bernanke is so far up the Dems butt and will be the first to go when Republicans take back full control 

4
Comment #5 by Anonymous posted on
Anonymous
Operation Twist and Shove...

2
Comment #6 by Inforay posted on
Inforay
Just when I thought things couldn't get any worse, it happens.  Discover Bank, the only national Bank which was paying 3.00% on ten year CDs which I was all right with purchasing, has now dropped the rate to 2.5%.   Now interest rates for people like me who were willing to buy long term CDs will all go even lower, with Operation Twist.  We are completely helpless in the face of this tsunami that is Ben Bernanke.

5
Comment #8 by chimay palmer (anonymous) posted on
chimay palmer
do credit unions offer safety deposit boxes my bank just tripled the cost  i am on a fixed income and the matress is the next stop

1
Comment #9 by Anonymous posted on
Anonymous
OPERATION TWIST?

CHUBBY CHECKER MUST HAVE COME UP WITH THAT ONE.

3
Comment #11 by Joe (anonymous) posted on
Joe
scottj: Ben Bernanke was a Bush nominee. Also the Fed runs seperate from the White House. The President, after nominating the Fed Chairman, has no control over Bernanke. Greenspan, before him, was nominated by Ronald Reagan - and served for 14 years.




Personally, I don't think the position is overtly political. But if you want to start casting political blame, learn your history first. ;)

17
Comment #12 by Anonymous posted on
Anonymous
For those from the 1960s, Chubby Checker sang his version of the "The Twist" during the early years of rock and roll.

The Fed chairman is nominated by the Prez, but the position isn't supposed to be politically oriented.  The chairman directs the monetary policies of the government and from an article that I read, was to blame for the current conditions because of a lot of deregulation and wrong decision making done during the tech bust of 2000-2002.

5
Comment #13 by lou posted on
lou
Joe, get your facts right. Bernanke's term as chairman runs 4 years. The next President will have the opportunity to replace him. Generally speaking, if the Chairman is not reappointed, he will almost always resign from the board. I will agree with you that Bush ****ed up, but our current moron reappointed Bernanke and two other governors who always vote with him. This Fed is a disaster and with their idiotic actions they themselves have made it political. I hope you will be satisfied when the dollar is worth nothing, and a bag of groceries cost a million dollars. Don't think it can happen?

4
Comment #14 by williamt posted on
williamt
Basically, the Fed's made a calculated gamble that it can continue propping up the stock market, this time not doing that by QE3, etc., but by shifting some bonds around. Two problems here. One, it may do little for the economy, as many economists are sayingm and, in the process, actually wind up just reinforcing the message to everyone on the planet (which the Fed would like to avoid reinforcing but can't when it takes this kind of action) that the economy stinks. Two, the stock market's probably pretty much oversold anyway, and the Fed's policy moves since the economy contraction have simply helped to blow up the bubble in the stock market.  The "house" (the bull party) at the stock market casino likes rising stock market prices and the bulls usually succeed in working the news to push stock prices up UNLESS the message of some news is really clear to enough folks that the house has to live with a downer day, like today.  What happened today was that the news from the Fed basically said--once more, that the economy stinks and the Fed will stumble along hoping it can help, but that people shouldn't expect all that much because it's really a propping-up gamble.

5
Comment #15 by mak1118 posted on
mak1118
The FED is only interested in propping up the stock market and they have been doing so since 2000. Greenspan with his 1% rates caused the boom and bust in housing, granted Wall Street, the Banks and Mortgage companies all piled on but it was the low interest rates that started it all and then Greenspan raised the rates on all the people with ARMs and then they got $crewed also. The FED needs to stop manipulating interest rates so at least the savers and retirees who did nothing wrong won't keep getting crushed if they don't will have some more people that need government help. I could understand if rates were low because the market decided it but I have a major problem with somebody manipulating the rates lower.

 

10
Comment #16 by Anonymous posted on
Anonymous
I bet that  forever gone now--3% for 10 yr Cds looks good now?! I remember your column in 2009 early 2010 kept talking about interst rates going up again--and the risk of putting your money away for a long time at 3 1/2% and 4% and people kept saying "no way" "that is too low" and waiting for the "interest rate fairy" to swoop in and create a 5% rate again--well I bet 2.80% looks really good at Apple FCU now? Even 2.45 at Alliant--better grab it while the grabbing is good----next year you will be lucky to find 1% for 20 yrs---basically when you see 3% or more --take it and run for the hills-----I live off my int. income and I put every penny I had in 5 and 7 yrs CD's when everyone told me I was crazy--and that we have hyper inflation on the way---well so much for that-----I even cashed out all my short term Cds at the time paying 6% and a little more to move over to long term 5% CD's because in the long run I would make up what I paid on penalties for closing the higher yeilding Cds out early and let go of those rates for cash in the long hall--glad I did---I actually have budgeted til 2018 for no return on my money other than 2%-and 2018--we may see 4% again

12
Comment #17 by Shorebreak posted on
Shorebreak
I'm wondering if we will start seeing the best rates for 5 to 7 year maturities at about 1 1/2 percent APY in coming months. My barometor is still the 7-year rates at the Texas credit unions Security Service and Randolph-Brooks. They have been a fairly good indicator in the past. Right now they are atill showing at least 3 percent APY for that product.

1
Comment #18 by pua posted on
pua
Chubby Checker, a rock musician, invented "the twist" (a dance move and also a song) in the 1960s.  But I was a fan of his competitor, Fats Domino.  And yes, that's no joke -- those were the actual stage names of those two guys.

2
Comment #19 by Anonymous posted on
Anonymous
chubby checker fats domino they had weird names in the olden days

1
Comment #20 by Screwed by Fort Knox CU (anonymous) posted on
Screwed by Fort Knox CU
Actually, this 'twist' bond move was first tried by the FED in the early 1960's, when Chubby checker's Twist song and dance were the No. 1 hits in the country.  A journalist in 1962 used the catchy memorable name "the twist' for the Fed bond move.

2
Comment #21 by Anonymous posted on
Anonymous
"The Twist" this time refers to the Fed's twisting their knife they had already stuck in our backs.

4
Comment #22 by Anonymous posted on
Anonymous
Just a note, this action will put downward pressure on short term rates--too--as banks will havr even less ability to make a profit on long term loans and need to keep certain amount of reserves on hand--so no this is not a joyous time to think we will now get good short term rates----we will actually be locked in on all side with low rates no matter where we turn. If you see a half way good rate---grab it  and grab it quick----they will be gone soon enough---

 

4
Comment #23 by Anonymous posted on
Anonymous
Many of the analysts following the Fed were on CNBC and Bloomberg.   Some said that Bernanke was hoping people would go after riskier assets in the stock market and presumably spend since they were not earning any interest on their savings and in the process prop up Gross Domestic Product.   Ron Mulenkamp (pardon the spelling if incorrect) seemed to think the opposite would happen.   People would retrench and not spend, protect assets by not putting them into long-term bonds since the value of those bonds would go down considerably if GDP all of a sudden perked up and the economy was on the mend.  They would not spend, they would do with less.  

My own comment is to add if they were on the verge of retirement, they might decide to stay on the job since their savings, both after tax, and pre-tax retirement savings in 401Ks and IRAs were making next to nothing in interest and spend only on necessities, no discretionary spending.   So staying on the job instead of retiring would mean that a younger worker looking to get employed would not be getting the non-retiree's job --- meaning unemployment would get even worse as a result of the Fed chairman's attempt at micromanaging the economy.   And since the non-retiree is not earning any interest on his savings and decided to retrench, he won't  be spending any additional funds to prop up the GDP.   All of Bernanke's meddling will have the opposite effect of what he wants to happen!    In my opinion he is playing with people's lives and he should not be doing so.   I thought capitalism meant free markets.   What we have going on now are "fixed markets."  There are millions of near-retirees as well as other savers who will be making decisions based on what's best for them -- not for Bernanke!!!
 

13
Comment #25 by Inforay posted on
Inforay
#23: Excellent analysis.  I agree.  The retiree who was making $25,000 - $30,000 annually on CDs which were paying 5% - 6% is now earning less than $2,500 annually.  They have a lot less spending power and will keep working and spend less out of worry.  My husband is working at 65 years but I fear my kids in their twenties and teens will not have jobs as older, experienced workers stay longer at their jobs out of fear of inflation and not having money in their old age.  This is having exactly the opposite effect than what was intended.  I am wondering whether Bernanke's only aim is to force everyone into the stock market so that it is artificially propped up and to basically give money to banks at zero percent.  There again, banks are hoarding instead of lending.  Hopefully Bernanke and his cohorts who vote with him will be booted out of the Federal Reserve Board by the next President.  Let interest rates be set by demand and supply as it should be in capitalist economy.

9
Comment #26 by bbug (anonymous) posted on
bbug
Just to clear up a very important matter. ;-)

It wasn't Chubby Checker who invented the twist. It was Hank Ballard. Ballard wrote it and recorded it in 1959 with the Midnighters, Checker's version was a note for note copy issued in 1960.

A little levity might help ease the pain of low interest rates.

5
Comment #27 by Anonymous posted on
Anonymous
Ken,

It’s a little amusing to me that some of your posters do not know who Chubby Checker (or Fats Domino) is.  It might be interesting to do a poll to graph the average age of those who read your blog.  I can guess the age of some by the wording of their posts.  In any event it would sort of be fun to see an age breakdown of your readers.

5
Comment #31 by williamt posted on
williamt
There's little to be gained from focusing on Operation Twist, comparisons to Japan, the Fed's policies in the 60s, etc., its "management" etc. Why?  Because the Fed can't realistically be expected NOT to  announce a change in policy given an economy on the ropes and a lack any improvement "around the corner." courtesty of ANY source, ANYWHERE, PLEASE. Sadly, the Fed's used up a lot of what tools it has in what it calls its "toolbox" and, unfortunately, the Fed's tools to date haven't (and can't) fix all that much except create/continue to expand a stock market in a more bubbled-up condition, if you can call that a real "fix". Also, it also isn't a matter of the Fed's policies "forcing" anyone into the market--you can always stay out of stocks, cut back on stocks, get out of stocks, get into gold, mattresses, cds, TIPS, etc., etc., it's always a matter of RISK-TAKING, and, for one, I DON'T like higher-risk investments. So, given the present situation, the expectations are gonna STAY LOWER for some time if ya don't like high risk.  The MAJOR reason WHY is the bad timing of fiscal policy: nine out of ten "fiscal doctors" say that what the economy needs fiscally is some short-term "heat"--and no, the private sector can't do that unless we're talking more "bubbles", and I sincerely hope we're not--and then, following the heat, the economy needs some fiscal "cold" over time, long-term.  And, since the Administration won't be able to get any really effective legislation to do what the doctors prescribe passed in the next year, and, even more importantly, since the GOP says definitely don't look to them for short-term heat, even if they prevail next year (which I think could well happen) then it does look like a long road ahead before we see that corner.   

2
Comment #32 by Anonymous posted on
Anonymous
OK, OK, if you're going to talk about Chubby and Fats, it only seems fair to also mention Little Richard, Chuck Berry, Elvis, The Platters, Nat King Cole, Clarence 'Frogman' Henry, Johnny Otis, Mickey and Sylvia, Johnny Horton, and on and on. BTW, anyone remember the lyrics of 'Ain't Got No Home'?

2
Comment #36 by Anonymous posted on
Anonymous
"Do you have any bananas?"

"Yes, we have no bananas today!"

Nice analogy- trained to say yes when the answer is no, so we dont lose the sale.

 

3
Comment #39 by Anonymous #32 (anonymous) posted on
Anonymous #32
And I forgot to mention "Smoke, Smoke, Smoke That Cigarette", a catchy little song by Tex Williams. Seems fitting to ease a bit of the tension nowadays, although I do not partake in the cigs myself.

3
Comment #40 by Anonymous posted on
Anonymous
scottj - You're right on...looks like Ben's on to something, or should I say on something. Once again, his ego in moving the markets, whether up or down, is his primary focus instead of the less glamourous chore of using common sense for the benefit of us all. The guy needs to move on, and soon.

3
Comment #42 by Anonymous posted on
Anonymous
How 'bout 'Man of Constnt Sorrow' from the movie Oh Brother Where Art Thou? Another tune that fits in very well with the current financial outlook. And BTW, anyone with some constructive financial, i.e., CD tips, feel free to chime in. Otherwise, just buy all the COP that you can lay your hands on....4% dividends while you wait for the triple play, or just be happy with 2% from Ally....your call.  

2
Comment #44 by generation zero (anonymous) posted on
generation zero
instead of x or y  this is what they will end up and should be called   and they deserve it always expecting mommy and daddy to have a blank check at the ready or grama or grand pa they are lazy show no respect and as the  song goes to continue with the commentors are a teenage waste land which should be expanded to the age of 30   

1
Comment #45 by williamt posted on
williamt
'Anonymous #42. Q. Please advise what is COP.

 

1
Comment #46 by mak1118 posted on
mak1118
#45 COP is Conoco Phillips stock.

2
Comment #47 by mak1118 posted on
mak1118
That is exactly what Bernanke is trying to get you to do, buy stocks. I have always found when somebody is trying to push you to do something you don't want to do it is probably best not to do it.

2
Comment #48 by deep purple (anonymous) posted on
deep purple
sorry   32 on the h20 is better

1