The Federal Reserve is met this week, and Chairman Ben Bernanke has announced a idea that is nearly 50 years old.
Let’s face it, the Fed has run through the usual playbook.
And still everyone hopes they have one more rabbit to pull out of our economic hat.
Well, they do and it goes back a way…it’s called Operation Twist.
Yes, and that’s how it got it’s name. The popular dance craze from the early 60’s was used to name a Federal Reserve tactic tried back then.
The goal is simple. Lower interest rates even more.
They plan to do it by changing it’s $2.7 trillion dollar portfolio of investments from short term securities to long term ones.
Jay Oliver of Adams Financial says, there’s not much else they can do right now.
“Politically it would be difficult to do another quantitative easing,” Oliver told KETK. “This may be what was available rather than first choice.”
While the Bank is under tremendous pressure to revive an economy that is creaking along on 3-cylinders, there are risks.
“What you get for it when you sell those bonds is determined by interest rates,” Oliver says. “And if interest rates have gone up since you purchased the bond, then the market value will go down. At near zero interest rates, if we were looking into the future and saying which way do we think interest rates are going to go, then they’re obviously going to go up.”
But since interest rates have been low for some time now, and haven’t spurred much in the way of growth, what are the chances this will work?
“There’s a lot of skepticism out there that it will not, as the critics would say of QE 1 and 2, not have that much impact in a positive way,” according to Oliver.
But the twist has periodically been revived lately, so Bernanke’s willing to try it one more time.
To top that off, today the Moody’s rating service downgraded the 3 largest banks in the country.
They say it’s unlikely the US would bail them out next time.
So apparently, they might not be too big to fail.