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.