Fed will revive Operation Twist in hope of stimulating recovery

 

A divided Federal Reserve, trying to do what it can to perk up the dreary economy, announced Wednesday that it would revive a half-century-old scheme intended to make borrowing even cheaper for consumers, businesses and municipalities.

Under the plan, known as Operation Twist, the Fed would sell $400 billion in shorter-term Treasury debt in its portfolio and use the proceeds to buy an equal amount of longer-term bonds by the end of June 2012 –- a shift aimed at pulling down mortgage and other long-term rates to stimulate borrowing and spending.

"This program should put downward pressure on long-term interest rates and help make broader financial conditions more accommodative," the Fed said in a statement issued after an extended two-day meeting in Washington.

The new initiative, announced with a sobering assessment of the economy, was widely expected by investors and analysts, but few think it will do much to speed up job growth or the stalling recovery. And it flies in the face of calls by congressional Republican leaders who took the unusual step of sending a letter Monday to the Fed chairman, Ben S. Bernanke, urging him to avoid further stimulus action.

As many economists see it, the economy’s underlying problem is weak demand. Mortgage rates already are at record lows, and other borrowing costs are relatively cheap. But many corporations remain reluctant to make big investments, concerned about weakening sales and a climate of uncertainty in the global economy and fractious domestic politics. Many smaller businesses are finding it tough to get credit from wary lenders. And with home prices depressed and job growth and incomes stagnant, worried consumers are putting off major buying decisions.

"Really, it’s not a problem interest rates are too high,” said Dean Croushore, an economics professor at the University of Richmond whose own preference was that the Fed stand pat. He noted that research from Bernanke and others showed the original Operation Twist produced very modest results in the early 1960s.

Still, it’s understandable why the central bank would act, Croushore said. “They want to appear to be doing something. They don’t think it’s going to hurt; it could help a little bit, so why not?”