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Will The Fed’s “Twist” Help the Economy?

By JLP | September 22, 2011

From today’s WSJ:

The latest move by the chairman was a decision to dramatically recast the Fed’s $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.

The shift toward longer-term Treasury securities was largely expected but slightly bigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise.

What it is exactly:

Under the new program, which resembles a 1961 Fed-Treasury program called “Operation Twist,” the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest the proceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.

Fed officials have become more concerned about the health of the mortgage market in recent months, with senior officials, including Mr. Bernanke, urging the rest of the government to find ways to support the sector. There has been growing concern in the mortgage industry in recent weeks that even as U.S. Treasury yields have been declining, mortgage rates haven’t fallen as much, preventing many homeowners from refinancing their home loans. The difference in yield between a 10-year Treasury note and a conventional 30-year mortgage has widened by almost half a percentage point.

The goal is to pull long-term interest rates down, which should bring down mortgage rates, which could spark home buying which could help the housing market. Lots of “coulds.”

I have limited knowledge about this stuff but I have to say I’m skeptical. Interest rates are already low and lots of people can’t refinance either because of poor credit or their house isn’t worth as much as it used to be so there’s no advantage to refinancing. Or, they don’t have a job.

The market is skeptical too. As of this writing, the Dow is down nearly 340 points (after dropping 283 points yesterday).

So what do you think? Will it help?

Source: Fed Launches New Stimulus (WSJ)

Topics: Economics | 15 Comments »


15 Responses to “Will The Fed’s “Twist” Help the Economy?”

  1. BG Says:
    September 22nd, 2011 at 9:16 am

    Will it ‘help’? I have no idea. My question is why would they (the Fed) announce their position change _before_ actually doing it.

    I’m sure any ‘gain’ they were going after will be quickly absorbed by Goldman Sachs, since the Fed showed the table their cards before making a huge bet.

    And the Fed knows that Goldman Sachs knows, which Goldman Sachs knows that the Feds know that they know… This game is much too deep for me.

  2. tom Says:
    September 22nd, 2011 at 9:19 am

    No.

    This will not help much at all. It’ll allow for cheaper borrowing, but how many people are really sitting on the sidelines waiting for rates to go even lower, both in business and housing?

    I mean, I might refinance because of this, but we won’t see a huge spike in home purchases. You have to have money and a job to buy a house. Everyone loves to say how housing will help stimulate the economy, but housing is just a byproduct, it’s the egg to the economy’s chicken.

  3. Jon Says:
    September 22nd, 2011 at 9:27 am

    Centralized planning was attempted in the past but proven not to work, it will never work.

    @BG,

    Remember the Fed is a private entity with some government influence.

  4. Russ Says:
    September 22nd, 2011 at 9:59 am

    It won’t do a god damn thing. The problem IS NOT LOW RATES. I don’t know why it is so hard for the politicians to understand this.

    The problem is underwater mortgages. Homeowner’s are stuck so it creates this overhang that paralyzes the housing market like never before.

    If the problem is underwater mortgages, there has to be a plan that addresses that issue specifically.

    What the Fed should have done with the $1 trillion they have pissed away is essentially payoff as many mortgages as possible for homeowners who have been in their homes, who are still employed, and still have good credit. No appraisal.

    Convert all the mortgages to 10 to 20 year fixed rate mortgages at about 1% interest rate. In five years or so, most of these homeowners will have restored their equity and the banks wouldn’t have underwater mortgages on their books. The payments on the mortgages would be nearly the same that they are making now but instead of paying interest, they are paying down the principal balances.

    There is nothing that can be done for homeowners with who have lost their jobs. You either can afford the mortgage or you can’t. If you can’t afford your mortgage at 4-5% interest rates, you need to get out of the house. They need to come out with some Federal edict that preempts state foreclosure processes that forces banks to either foreclose or short sell in 90 days. The inefficiency of the default process is what is also causing friction in the market unnecessarily.

  5. BG Says:
    September 22nd, 2011 at 11:12 am

    “Remember the Fed is a private entity with some government influence.”

    Who’s $400 billion is the Fed gambling around with? Please don’t say taxpayer money….

  6. Jon Says:
    September 22nd, 2011 at 12:23 pm

    Well, if they’re printing it then it’s a tax through inflation, if the government borrowed it, then it’s a tax against future generations, if it is just from the US coffers then it’s a direct tax.

    Well, I suppose it is always “taxpayer money.” Granted, once the government gets it it isn’t the money of the taxpayers any more, it is the money of the special interests, whomever they be.

  7. The Biz of Life Says:
    September 22nd, 2011 at 12:44 pm

    It probably would have been better if Bernanke had kept his mouth shut and done nothing. Raising short rates and lowering long rates won’t help the banks earn their way back to health, but stands a remote chance of helping reducing the excess housing inventor. Of course, bulldozing houses can help reduce the inventory too, but I don’t think that is a productive activity either.

  8. Harm Says:
    September 22nd, 2011 at 12:58 pm

    WTF!?
    THE PROBLEM IS NOT HIGH RATES!!!!!
    If anything, the problem is low rates. And
    government trying to solve problems that aren’t
    their concern.

  9. MerCyn Says:
    September 22nd, 2011 at 1:14 pm

    After years of low rates I would think most people who wanted to refinance – or were able to get refinancing – have already done so. The mortgage process needs to be streamlined and revamped – including the appraisal process – so people who can afford to pay a mortgage can get one. I have no idea if the Fed program will work, but as long as it does not make the situation worse, any ideas now are worth a try.

  10. BG Says:
    September 22nd, 2011 at 1:22 pm

    “In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities.”

    That line is the scary bit for me. Whose toxic-debt are we buying now? Which bank is getting bailed out? Banks need to eat their own losses and not dump them on the US taxpayer.

  11. Sam Says:
    September 22nd, 2011 at 1:40 pm

    I think that the Fed is doing this basically so they can say they did something – anything. I don’t see any real benefit.

  12. JLP Says:
    September 22nd, 2011 at 1:46 pm

    BG,

    I thought the same thing when I read that about them purchasing MBS (again).

    As of this writing, the Dow is down 690 points in two days…

  13. Retired at 40 Says:
    September 22nd, 2011 at 2:18 pm

    QE and Twist is not about the economy. It is about the stock market. The Fed wants to pump it up to fool people into thinking prosperity is at hand and get them to spend more money.

    Bernanke was pretty forthright about this in his last attempt but as soon as it was removed, the market deflated.

    He’s couldn’t really do another QE so he’s doing what he can. The market was expecting something much bigger so it’s selling off.

    It will not work but they had to try to do something just to say they did.

  14. Jack Says:
    September 22nd, 2011 at 2:25 pm

    Praytell, where does the fed get all this money, anyway?

  15. Retired at 40 Says:
    September 22nd, 2011 at 2:30 pm

    It gets it from the treasury with a phone call. It has an unlimited supply.

Comments