Ben Kenobi Launches Operation Twist: Will it Save the Republic?

The Federal Open Market Committee (FOMC) just announced that it’s going to begin another round of asset buying, this time offsetting its purchases of longer-dated securities with sales of shorter term holdings. The goal? Flatten the yield curve. The hope? Engineer a recovery by helping homeowners refinance at lower rates and making broader financial conditions more attractive to would-be-borrowers.

At this point, it looks like Obi-Ben Kenobi realizes that Congress isn’t going to lend a hand with the recovery. Indeed, as a scholar of the Great Depression, he’s probably deeply concerned by the “Go Big” mantra that is now drawing support from people like Alice Rivlin, former Vice Chair of the Federal Reserve.  And so it is Ben, and Ben alone, who must fight to prevent the double-dip. It is as if he’s responding to the public’s desperate cry, “Help me Obi-Ben Kenobi. You’re my only hope.” Will it work?  Not a chance, but that conversation is taking place over at Pragmatic Capitalism, so drop in and find out why.  Below is a description, taken from the full FRB press release, that describes just what the Fed is going to do.  May the force be with us all.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the 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 Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”

About Stephanie Kelton 24 Articles

Affiliation: University of Missouri

Stephanie Kelton, Ph.D. is Associate Professor of Economics at the University of Missouri-Kansas City, Research Scholar at The Levy Economics Institute and Director of Graduate Student Research at the Center for Full Employment and Price Stability.

Her research expertise is in: Federal Reserve operations, fiscal policy, social security, health care, international finance and employment policy.

Visit: Economic Perspectives

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